The beginning of this year did not bring much positive news for ExxonMobil's ( XOM -0.64% ) shareholders, and its shares are down 5%. The oil giant is struggling to assure investors that meaningful growth is possible for a company of its size. This year, the company is projecting flat production growth, which could mean a lackluster year for ExxonMobil's shares.
Humble production outlook
As ExxonMobil expects zero production growth in 2014, earnings growth in the upstream operations will be in the hands of oil and gas prices. So far, growing output from unconventional oil sources has limited the upside of oil prices. Natural gas pricing remains sluggish even after most companies decreased their natural gas output. The big, dormant natural gas production capacity, especially in the U.S. unconventional plays, remains a limiter for natural gas upside.
Back in 2013, ExxonMobil targeted to grow its production from 4 million barrels of oil equivalent per day (boe/d) to 4.8 million boe/d in 2017. During its latest analyst meeting, the company stated that it targets to grow its production to 4.3 million boe/d in 2017. This is just a 7.5% production growth.
The company plans to allocate just under $40 billion on capital spending this year, with this number declining to less than $37 billion per year from 2015 to 2017. Thus, ExxonMobil will focus on maximizing its free cash flow and growing distributions to shareholders.
Focus on buybacks leads to lower yield
As ExxonMobil cannot compete with smaller companies in terms of production growth rates, it must increase its investment attractiveness through dividend payments and stock buybacks. In terms of the dividend yield, the company lags its peers like Chevron ( CVX -0.63% ) and BP ( BP -0.55% ). Chevron yields 3.50% and BP yields 4.70%, while ExxonMobil yields 2.70%.
ExxonMobil's lower yield should not be much of a surprise as the company allocates more of its free funds to share repurchases rather than to dividends. This is also the case for Chevron, but the difference between the money spent on buybacks and the money spent on dividends is lower than in ExxonMobil's case. Last year, BP equally split its shareholder money distribution between the two vehicles, which helped the company achieve an attractive yield.
As it is increasingly difficult to find attractive projects for a company of ExxonMobil's size, it could target further dividend growth in the future. However, the flat production outlook in 2014 leaves little room to achieve meaningful progress on the free cash flow front.
ExxonMobil shares lack catalysts for growth from current levels. The company has lowered its production growth targets in comparison to last year's statements. This means that ExxonMobil will have to prove that lower growth will come with increased margins.
The company spends big money on share repurchases, but its stock performance remains sluggish, indicating a lack of buying interest from investors. ExxonMobil's size means that the company has sufficient funds to pursue different investment opportunities. However, ExxonMobil struggles to find enough big projects to drive shareholder return, and is forced to spend a sizable chunk of its free cash flow on share buybacks. All in all, 2014 is likely to be a year of muted performance for ExxonMobil's shares.