ExxonMobil (NYSE:XOM) is an easy stock to hate today. It is an environmentally dirty oil company, always volatile, energy prices are low, and, despite headwinds, it's doubling down on its investment in the carbon-spewing fuels it produces. But one thing investors have to give Exxon credit for is coming through on its plans. And shale is one of the big ones.
Going against the grain
Investors have been pushing energy companies like Exxon to pull back and focus on returning cash to investors via dividends and stock buybacks. Domestic peer Chevron (NYSE:CVX), for example, is holding its spending to "just" about $20 billion a year. Although it is benefiting from the fruits of earlier spending -- and is hardly falling behind production wise -- the investments it is making today, relative to cash flow, are among the lowest of its peer group. Meanwhile, the company bought back $4 billion worth of stock in 2019 and increased its dividend 8% in the first quarter of 2020.
Exxon is taking a very different approach. It has plans to spend as much as $35 billion a year through 2025, with much of that going toward expanding its oil and natural gas production.
That spending will require it to sell assets and add debt to its balance sheet if oil prices remain low. It has also stopped buying back shares so it can free up more cash for its capital investment plans (the dividend, however, continues to grow).
Management is unapologetic about its steadfast commitment to more spending, with CEO Darren Woods noting during Exxon's fourth quarter 2019 conference call:
We know demand will continue to grow driven by rising population, economic growth, and higher standards of living. We know that excess capacity will shrink, typically faster than people think, and margins will rise. Then, new capacity will be needed. These are the classic price cycles of capital intensive commodity industries.
He admits that spending like this comes with a "downside" because it is a "draw on cash." But if he is right, Exxon is positioning itself for better days ahead.
Investors, however, are concerned that Exxon is making the wrong call. That's understandable, but there's another takeaway here. Like the plan or not, Exxon is delivering on its promises.
One of the key regions Exxon has targeted for production growth is the onshore U.S. market. It is hitting the ball out of the park. In the first quarter of 2019, Permian production increased 140% year over year. In the second quarter it advanced 90%. Third quarter production expanded 72%. And 2019 ended with a fourth quarter year over year Permian growth rate of 54%. For the full year, 2019 production from the Permian increased 79% over 2018 results.
While those numbers are huge, the company is simply on track with its long-term plans. In fact, there's still plenty of growth ahead in the onshore U.S. market.
For example, it believes that it has only developed around 20% of its resource base in the Midland region and just 3% of what it has in the Delaware region. Based on the company's current projections, it will more than double its onshore U.S. production by 2025. The quarterly and annual growth rates will likely slow as the scale of this operation continues to expand, but the long-term outlook here remains huge.
One of the key differentiators is that, unlike many of the smaller operators that kick-started the rebirth of onshore U.S. oil development, Exxon is still financially strong. Although the company's final 2019 balance sheet isn't available yet, at the end of the third quarter its financial debt to equity ratio was just 0.15 times. That's low for any industry, let alone for an oil major (only peer Chevron can claim to have a ratio that low). So while debt-heavy and smaller players drop out of the mix, Exxon can keep going.
Adding to the successes here, Exxon also started to produce oil in its massive Guyana project in late 2019. It did so below budget, and more quickly than the industry average.
That project will be ramping up in 2020, with more development in the years ahead. So not only is Exxon doing well in the onshore U.S. space, it's also executing well in its other efforts. Regardless of what you think about Exxon's strategic plan, it is doing a good job of living up to its stated goals.
Controlling what it can
Exxon can't control the price of oil. What it focuses on is being the best at what it does, which is drilling for oil.
There is no question that it is out of step with the market and many of its peers, as it spends while others are pulling back. But the energy giant deserves credit for its successes -- it is executing well on its plan to increase production. And there's a lot more growth ahead, given the continued upside in the onshore U.S. space and the start-up of production in Guyana.
If Exxon is making the right call by investing in the downturn, it is proving right now that it will be a big winner when oil prices recover.