Inflation has dented the profits of countless businesses. But higher energy prices have been a boon for ExxonMobil (XOM -2.78%). The oil and gas giant's stock, in turn, has rebounded sharply from its pandemic lows. Yet, even more gains likely lie ahead for Exxon's shareholders. Here's why.
1. The oil market is strengthening
Key members of the Organization of the Petroleum Exporting Countries (OPEC) recently agreed to cut their production by more than 1 million barrels of oil per day beginning in May.
The news helped to drive oil prices higher, along with the stock prices of many energy producers. OPEC has a long history of working to preserve the profitability of the oil industry, and investors were pleased to see that trend continue.
At the same time, China is relaxing its COVID-19-related restrictions and reopening its economy. Combined with the rising demand for travel in the U.S. and many other countries, these factors are likely to increase oil consumption and apply upward pressure on prices.
As a major oil producer, Exxon stands to profit handsomely from these trends.
2. Exxon is investing in low-carbon energy
Although oil and gas will continue to account for the lion's share of Exxon's revenue for the foreseeable future, the energy titan also sees a staggering, multitrillion-dollar opportunity in low-carbon solutions.
Exxon plans to invest roughly $17 billion by 2027 to lower its own emissions and help other companies reduce theirs. Key areas of investment include carbon capture and storage as well as hydrogen and renewable diesel production.
Exxon is targeting returns of 10% to 20% for these projects, so they are far more than just environmental- or public relations-focused initiatives. These are legitimate and potentially highly profitable ventures.
In all, the company estimates that its annual revenue from low-carbon services could grow to tens of billions of dollars in the coming decade. Looking even further ahead, Dan Ammann, president of Exxon's low-carbon solutions segment, believes the business he oversees could eventually eclipse the company's core oil and gas operations. That's a stunning statement, considering that the energy behemoth generated the majority of its more than $400 million of revenue from these segments last year.
Better still, Exxon is securing its low-carbon services revenue with long-term contracts. This should help it generate more consistent and predictable profits over time, particularly when compared to its highly cyclical oil and gas businesses.
3. Acquisitions could accelerate Exxon's growth
In addition to its internally developed expansion projects, Exxon is also on the hunt for attractive assets to purchase. It's reportedly exploring a deal with Pioneer Natural Resources (PXD -2.28%) and at least one other company, according to The Wall Street Journal.
Pioneer possesses a prominent presence in the Permian Basin, a major oil- and gas-producing region in the Southwestern U.S. The fracking leader owns some of the most valuable assets in the shale patch, an area Exxon has targeted for investment.
A potential acquisition of the Pioneer won't be cheap. Its market cap currently stands at more than $50 billion, and Exxon will no doubt need to pay a sizable premium to entice Pioneer's shareholders to sell. However, it's a price Exxon can probably manage. The oil colossus produced over $55 billion in profits in 2022 alone.
