A theory of investing has developed around the purchase of stocks which are drawn from the Dow Jones Industrial Average or the S&P500 as they tend to continue and outperform both the indices and the companies that replaced them over the next year or so. ExxonMobil (XOM 0.69%) is a case in point.
The oil and gas giant was ejected from the Dow Jones in August 2020, and a year later beat the index with a total return of 37% to 29%. Exxon continued to open a dramatic lead over the Dow Jones in the years that followed, with its total return more than tripling in value relative to the index, generating a 25% total return for investors.
In its just-released fourth-quarter earnings report, the energy giant explains why it’s become such a stellar stock and why it’s more than the current conditions that are favorable for the industry.
A source of profit
Exxon just posted its best earnings year in the oil company’s 135-year history, generating $55.7 billion in profits, making it one of the most profitable stocks in the market ( only Apple And Microsoft are better, so far).
While rising gas prices that were exacerbated by Russia’s invasion of Ukraine were certainly a significant factor in Exxon’s performance, and excluding writedowns related to its withdrawal from its Sakhalin oilfields -1 off the Russian island of Sakhalin, adjusted profits were $59.1 billion. There were other factors involved, those that indicate potential for future profitability.
President and CEO Darren Woods pointed to years of underinvestment in production by the industry, which has limited supply. Oil and gas companies will not be able to meet the outsized demand from its collapse during the pandemic for the next few years.
Crude supplies have been depleted and natural gas inventories have been drawn down, a situation that has only worsened with Europe’s concern over where it will get the energy it needs .
Prices for both are well above their 10-year historical averages, and refining margins have climbed due to the large number of refineries that have been closed during the pandemic, leading to a drop in global refining capacity from 910,000 barrels per day in 2021 – the first time in three decades there has been a decline in global capacity.
Capacity follows profits
The loss of capacity has resulted in higher crack spreads, or the price difference between a barrel of oil and the refined products made from it, through 2022. But the higher refining margins generated lead to increased capacity and the US Energy Information Administration expects it to increase by an additional 1.6 million barrels per day this year.
The Al-Zour refinery in Kuwait is one of the largest oil refineries in the world, capable of processing up to 615,000 barrels of crude per day, and it shipped its first exports of diesel and jet fuel to the Europe at the end of last year. Saudi Arabia and the United Arab Emirates are also expected to increase European exports in 2023.
Exxon has also upgraded its own refinery in Beaumont, Texas, to increase capacity by 65%, or some 250,000 barrels per day, which is expected to come online in June. It represents the largest capacity addition to the U.S. refining fleet since 2013, but it’s important to remember that Exxon is a global energy giant, and of the $12.75 billion in net profits that it generated in the fourth quarter, $7.9 billion, or 62%, came from Outside the United States
Against a current
The energy giant was able to capitalize on current conditions as it zigzagged when other industry players zigzagged. Woods said: “Of course, our results have clearly benefited from a favorable market, but to take full advantage of the undersupplied market, our work began years ago, long before the pandemic when we chose to investing counter-cyclically”.
Exxon has invested heavily in its core businesses, such as its refining business with projects in the Netherlands and Texas; in liquefied natural gas (LNG) export facilities around the world, such as in Mozambique, where it began shipping its first cargoes from the Coral South project in November; and in new production in the Permian Basin and the vast oil field off Guyana, where it is the main operator and estimates it can produce up to 1 million barrels of oil per day by the end of the decade.
Exxon announces that it will invest between $20 billion and $25 billion per year through 2027 in new capital spending across the company.
Share the wealth
With operating cash flow up 60% this year to $76.8 billion, it spent $30 billion on stock buybacks and dividends last year. It plans to repurchase $35 billion worth of stock in 2023 and 2024. Exxon also increased its dividend by 3% last year, the 40th consecutive year the payout has increased.
With global structural imbalances between supply and demand, years ahead of the game in making investments to close the gap, and sharing its success with its shareholders, ExxonMobil is an integrated oil and gas stock that still has many years of growth ahead of her.
Rich Duprey holds positions at ExxonMobil. The Motley Fool holds posts and recommends Apple and Microsoft. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.