ExxonMobil (XOM 1.08%) takes an integrated approach to operating in the volatile oil and gas sector. It owns upstream (oil and gas production), midstream (pipelines), and downstream (refining and chemicals) assets. This diversified strategy helps mute some of the impact of volatility in the energy sector since its downstream businesses benefit from lower energy prices.
Exxon's integrated strategy has enabled it to produce steadier cash flow over the years than its rivals focused on either end of the energy market value chain. It has also enhanced its growth. It's a big reason Exxon has been able to increase its dividend every year for the last four decades.
The oil giant sees a lot more growth ahead for its downstream business. That could give it more fuel to continue increasing its dividend, making ExxonMobil stock look like an even more compelling long-term investment opportunity.
A trio of growth drivers
ExxonMobil recently spotlighted its products solution segment, which includes its refining and chemicals operations. The company expects this segment to generate $16 billion in annual earnings by 2027. That's nearly triple what the business produced in 2019 at average margins.
Three catalysts fuel Exxon's view:
Image source: ExxonMobil.
As that slide showcases, strategic projects are the biggest contributor to earnings growth within Exxon's product solutions business. The company has a large pipeline of capital projects currently underway to fuel this growth.
Exxon recently completed a 250,000 barrel per day (BPD) expansion of its Beaumont, TX, refinery. That increased its capacity to 619,024 BPD, allowing Exxon to take greater advantage of oil supplies from the Permian Basin, where it has a large upstream operation. The expansion will primarily increase its capacity to produce diesel.
In addition to the earnings growth from expansion projects, Exxon expects operational improvements and other structural cost savings to further boost earnings and free cash flow. Exxon is on track to produce industry-leading free cash flow from its product solutions operations over the next several years. That will give it more fuel to grow its dividend.
Built with the future in mind
Exxon has continued to invest in growing its legacy refining business even though many industry forecasters believe refined petroleum product demand will peak by the end of this decade and start declining. While Exxon is more optimistic as it foresees demand plateauing for many years, it's still gearing up for the energy transition to lower carbon fuels.
One way it's doing that is by merging its refining, petrochemicals, and low-carbon businesses into one unit to achieve greater integration. That allows it to co-locate refining and chemical assets at the same site for greater future product flexibility. Exxon can switch gears as demand for refined fuels declines and make renewable fuels or petrochemicals from that location.
Exxon also believes reconfiguring existing assets will generate higher investment returns than building a new facility. For example, reconfiguring existing Exxon facilities for biofuels can generate returns of 15% to 30%, while new greenfield projects would only deliver an 8% to 15% return on capital.
The company is also investing in advanced recycling to reduce plastic waste for reuse in its petrochemical facilities to make other products. Exxon has 12 projects under development, which could enable it to grow its advanced recycling capacity to about 1 billion tons per year by the end of 2026. These investments will help the environment while providing Exxon with a low-cost supply source for its operations.
Becoming a much more meaningful business
ExxonMobil currently generates most of its income by producing oil and gas, with its downstream assets helping mute some of its earnings volatility. However, Exxon foresees those businesses becoming a much more meaningful contributor by 2027. They should help supply the energy giant with more fuel to keep its dividend growth engine humming along. It makes Exxon look like an appealing long-term investment option for investors seeking dividend growth.
