After some really challenging times, ExxonMobil (XOM -2.56%) seems to be moving in the right direction. The pandemic-driven destruction of demand for oil and gas hurt ExxonMobil more than other oil companies, partly because of its high debt burden and capital investments. But its efforts to set things right, combined with stronger oil prices, have driven the company out of the mess to a large extent.
Let's discuss how ExxonMobil envisions itself a decade from now.
ExxonMobil's drive to improve performance
As the chart shows, ExxonMobil historically produced higher return on invested capital than its peers. Though returns fell across the board in 2020, ExxonMobil's returns fell more than that of other oil giants. In fact, the company's returns started to fall in 2019 even before the pandemic.
XOM return on invested capital. Data by YCharts.
But ExxonMobil once again generated peer-leading returns in 2021, thanks to the several steps that it took to improve its performance and address investors' key concerns. These include structural cost reductions, a focus on high-value products, and investing in competitively advantaged projects. This allowed ExxonMobil to repay $20 billion of its debt last year.
ExxonMobil's break-even oil price -- the Brent crude price needed for the company to generate positive cash from operations -- has fallen to $41 per barrel. That means it can generate positive cash from its operations if Brent crude is above just $41 per barrel. And the cash generated will rise when oil prices are higher.
Image source: ExxonMobil. IOCs = International Oil Companies.
ExxonMobil's efforts significantly improved its cash flow from operations in 2021 compared to the last three years. The growth in Exxon's cash from operations was higher than its top peers. In 2021, ExxonMobil's cash flow from operations grew more than 200% over 2020 -- higher percentage growth than its peers. The international oil companies (IOCs) in the chart above include Chevron, Royal Dutch Shell, BP, and TotalEnergies. The growth was higher not only over 2020, but also over 2019 and 2018 -- periods well before the pandemic.
Clean energy solutions
In response to the changing energy-market conditions, ExxonMobil is increasing its focus on low-carbon energy solutions. The company believes that it has the potential to generate substantial cash flows from low-carbon businesses a decade from now.
Image source: ExxonMobil. IEA = International Energy Agency. NZE = net zero emissions.
ExxonMobil's focus areas in low-carbon solutions include carbon capture and storage, hydrogen, and biofuels. The above chart shows ExxonMobil's capital expenditures and operating cash flow based on management's estimates under the International Energy Agency's 2050 Scenario for Net Zero Emissions. ExxonMobil could be generating as much as two-thirds of its operating cash flow from low-carbon solutions by 2050.
It is important to note that this modeled scenario highlights ExxonMobil's flexibility to shift to clean energy projects, should they become more attractive in terms of returns than its traditional oil and gas business. That does not mean that the company will shift to this mix, and any progress to this end will largely depend on the expected returns from Exxon's traditional businesses versus low-carbon solutions.
For shareholders, the improvement in ExxonMobil's operational performance and debt levels, as well as its potential to transition to clean energy solutions, are both welcome news.
