Oil stocks had a good start to the morning on Thursday, with shares of Chevron (CVX 0.80%) gaining 2.2% through 10 a.m. ET, ExxonMobil (XOM -0.06%) up 2.8%, and oilfield services company Core Laboratories (CLB) rising 3% -- and no wonder.
By all accounts, China seems to be relaxing its zero-Covid policies, which should benefit its economy and boost its oil demand. Oil prices logically moved higher in response, with West Texas Intermediate crude up 1.3% and Brent crude inching higher as well. Best of all, management at ExxonMobil just released a bullish forecast for the company's next five years.
In a conference call with investors Thursday morning, and in an accompanying press release, ExxonMobil CEO Darren Woods and CFO Kathryn Mikells explained how the energy giant intends to spend up to $25 billion annually on capital investments through 2027, reduce operating costs, pay down debt, and buy back $50 billion worth of stock over the next two years -- all while maintaining profits and cash flow at twice the levels ExxonMobil had in 2019, before the pandemic began.
Oil sector investors of all stripes seem to be responding well to what ExxonMobil described as its "five-year plan." Chevron stock gained in apparent sympathy, and Core Labs -- which benefits from increased capital investment by the oil majors -- gained even more. Yet all three companies' early stock price gains seem to be fading a bit as the day wears on.
Why might that be?
While words like "billion" and "double" may immediately draw the eyes of investors -- and ExxonMobil's promises to pay down debt and buy back stock are clearly shareholder-friendly moves -- consider what the company is actually saying about its outlook.
Over the past 12 months, ExxonMobil has reported $51.9 billion in GAAP net earnings, and generated positive operating cash flow of $76.3 billion, according to data from S&P Global Market Intelligence. But note that when management says it will "double" earnings and cash flow by 2027, it isn't using its 2022 numbers as a reference point, but rather its 2019 numbers.
And what did ExxonMobil earn in 2019? Again referring to S&P data, Exxon's 2019 profits were only $14.3 billion, and its cash flow was $29.7 billion. Granted, these numbers are also big -- but they're not as huge as the profits it reaped in 2022, a year in which oil markets were thrown into turmoil by Russia's invasion of Ukraine, not to mention the other geopolitical issues that crimped crude supply even as demand rose.
Using 2019 as a reference point, ExxonMobil's prediction that 2027 profits and cash flow will "double" would appear to work out to a prediction of 2027 earnings of roughly $28 billion or $29 billion, and cash flow in the neighborhood of $60 billion.
Again -- big numbers. But these numbers are nonetheless far less than what ExxonMobil has been earning this year. And not to beat a dead horse, but that means that five years from now, management expects ExxonMobil will earn less than it is earning today. I suspect that the reason the stock prices of ExxonMobil, Chevron, and Core Labs have been retracing their paths is that this is becoming clearer to investors.
Rather than boasting of its future profits, what ExxonMobil really did Thursday is remind investors that oil is a cyclical industry, and that today's boom times will not last.