ExxonMobil (XOM 1.15%) produced a prodigious profit last year. The oil giant tallied $55.7 billion of earnings in 2022, the most money ever earned by a Western oil company. It smashed Exxon's prior record of $45 billion in 2008.
The oil company's historic profits have been called "outrageous" by the Biden administration. While it might be easy to criticize the oil company for cashing in while consumers felt pain at the pump, it's important to know what fueled the oil company's monster profit last year. On Exxon's fourth-quarter conference call, CEO Darren Woods provided an inside look into what helped Exxon deliver its historic profit.
Positioned to profit
Woods stated the obvious on the call, noting that "of course, our results clearly benefited from a favorable market." Oil and gas prices were much higher last year, fueled partly by Russia's invasion of Ukraine. Demand was also strong as the global economy continued to recover from the pandemic. That created an undersupplied market as oil companies struggled to produce enough to meet demand, which drove up prices.
However, last year's pricing wasn't the sole catalyst for Exxon's record-smashing results. The company had put itself in a position to profit from improving market conditions. Woods noted on the call:
To take full advantage of the undersupplied market, our work began years ago, well before the pandemic, and we chose to invest countercyclically. We leaned in when others leaned out, bucking conventional wisdom. We continue with these investments through the pandemic and into today. This year, our improved asset portfolio, organization changes, and strong operating performance came together to deliver industry-leading results, industry-leading earnings, cash flows, return on capital employed, and total shareholder returns.
Exxon faced criticism back then for continuing to invest when others were pulling back. The company's debt ballooned in 2020 as it borrowed money to fund the growing cap between its cash flow and capital program:
XOM Net Financial Debt (Quarterly) data by YCharts
However, those investments grew production where it mattered most, fueling record cash flow last year. That enabled Exxon to pay down $7.2 billion in debt last year while growing its cash balance to nearly $30 billion, driving its net-debt-to-capital ratio to 5%, well below its 20% to 25% target.
Making the right investments
A big factor helping fuel Exxon's historic profit last year was where it made investments in recent years. The company has focused on investing money in its highest-margin projects, targeting those that can deliver a greater than 10% return at $35 oil. This strategy paid big dividends last year. Woods stated on the call that "despite lower revenues, we delivered higher profits than 2012, our previous record year." (2012's earnings were higher on a non-GAAP basis than 2008 but slightly lower on a GAAP basis.) That's due to a "400-basis-point improvement in profit margin, reflecting upgrades to our product mix, structural cost reductions, [and] disciplined expense management."
Woods also noted that "we've continued to strengthen our industry-leading portfolio and increased production from high-return advantaged assets in Guyana and the Permian at a time when the world needed it most." The company's strategy to focus its investments on its highest-return assets enabled Exxon to make more money last year, even though it generated less revenue than during its peak profit years. This distinction showcased that Exxon wasn't solely relying on high prices to produce its historic profits.
Exxon plans to continue executing its long-term investment strategy this year. That plan would see it invest $20 billion to $25 billion per year on capital projects through 2027, with spending toward the upper end of that range this year -- $23 billion to $25 billion. The bulk of that money will go toward its four highest-return assets: the U.S. Permian Basin, Guyana, Brazil, and LNG. By focusing on investing in those opportunities, Exxon expects its profits to double from 2019's level by 2027, assuming similar oil pricing to that base year.
Exxon's long-term approach is paying off
Exxon zigged when others zagged during the pandemic-driven oil market meltdown a few years ago. It stuck to its strategy and continued to invest in its best assets. That plan paid off spectacularly last year, as Exxon produced the highest profit ever for a Western oil company, even though oil prices didn't sustain their invasion-fueled highs. This outperformance showcased the brilliance of Exxon's investment strategy. That plan could continue to pay big dividends for investors in the coming years as the company maintains its focus on investing in its highest-return assets.
