Patience is a virtue. After several years of negligible dividend increases and share repurchases, Exxon Mobil Corporation (XOM) shareholders are finally being rewarded.

In my recent Imperial Oil Is Gushing Free Cash Flow post, I reviewed how the company is gushing free cash flow and is likely to continue to do so over the foreseeable future. Despite this positive outlook, I do not have direct exposure to IMO. Instead, I have indirect exposure to (IMO) by being a XOM shareholder; XOM owns 69.6% of IMO.

In my IMO post, I mention that some investors might prefer to invest in that company versus XOM because IMO’s operations are restricted to Canada. Canada’s political and economic conditions are relatively stable thus making its economy the 15th freest in the 2022 Index of Economic Freedom. Furthermore, Canada is ranked 1st among 32 countries in the Americas region, and its overall score is above the regional and world averages.

XOM, however, operates in countries that rank poorly in the 2022 Index of Economic Freedom! For example, XOM has operations in Argentina. This country’s economy is ranked the 144^th globally and 27^th among 32 countries in the Americas region as being freest in the index. This global ranking is even worse than that of Nigeria, Angola, and Cameroon. On the bright side, Argentina’s ranking is slightly better than that of Chad, another country in which XOM has operations, which is ranked 146^th.

All these aforementioned countries have an overall economic freedom score below their regional and world averages.

Think Big Picture

Many investors foolishly focus on a company’s short-term share price behaviour. This was readily apparent when a whole new breed of novice investors realized day trading could easily be conducted from the comfort of home.

The problem with this form of ‘investing’ is that investors focus on the VERY short-term. Meanwhile, Executive Management and a company’s Board of Directors are strategically planning for well into the future.

Think about the compensation packages of senior management and a company’s Board. Compensation packages at the most senior levels often include stock awards and/or stock options. Oftentimes, the salaries and bonuses pale in comparison to the income potential from stock awards and/or stock options.

XOM’s Notice of 2022 Annual Meeting and Proxy Statement shows the manner in which Directors and Executives are compensated. Compare the value of the stock awards with the value of salary and bonus for XOM’s Executives. Next, compare the value of stock awards to the value of fees earned by the Non-Employee Directors.

Given the compensation structure, XOM’s Executives and Board members have a vested interest in ensuring XOM’s value increases significantly over time! This focus will reward XOM’s shareholders over time.

Obviously, the focus cannot exclude a company’s short and medium-term performance. Neglecting how a company performs over shorter timeframes may lead to a company’s demise. However, if the bulk of the compensation lies in how well a company performs over the long term, management has every incentive to ensure decisions made today will benefit the company over the long term.

Since Executives and Boards view a company through a long-term lens, it is critically important investors do the same. Fixating on intra-day share price fluctuations is unwise.

Company Overview

Most investors are undoubtedly familiar with XOM to some extent. A great source of information from which to gain a deeper understanding of the company, however, are the 2021 Annual Report and the Form 10-K.

I have also covered XOM in several posts with my most recent being on February 25, 2020 and July 23, 2021.

Industry Overview

I reference the Industry Overview in my recent Imperial Oil (IMO) Is Gushing Free Cash Flow post in which I include links to recent interviews with XOM’s CEO. The interviews are lengthy but worthy of your time if investing in the Oil and Gas sector piques your interest.

The post also includes a link to 2 industry experts discussing falling inventories, OPEC spare capacity, $180 oil, and their outlook for energy stocks.

When I completed my mid-2022 Investment Holding Review in early July, XOM was my 19^th largest holding. Chevron Corporation (CVX) was my 3^rd largest holding and I have covered CVX more frequently than XOM; these posts are accessible through the FFJ Archives.

In all these posts, I repeatedly share why the demise of the oil and gas industry is overblown and why I think we are at the beginning of a multi-year oil bull market.

The Electric Vehicle (EV) Boom

Many investors think the electric vehicle boom will be detrimental to the oil and gas industry participants. I think this risk is completely overblown for a variety of reasons.

In my July 22, 2021 post, I discuss the supply and demand outlook and point out that India’s Energy Minister lambasted the richer world’s carbon-cutting plans at a major climate conference in early 2021. He called long-term net-zero targets, ‘pie in the sky’ and stated that poor nations want to continue using fossil fuels and the rich countries ‘can’t stop it’.

Clearly, economic development and not decarbonization is a priority for poorer countries with a growing population.

Investors in developed countries need to come to grips with the fact a huge percentage of the global population is in lesser developed countries experiencing rapid population growth. People in these lesser developed countries are striving to improve their lot in life. They really do not care if advanced economies are sounding the alarm about the environment.

Although the trend is toward more ‘environmentally friendly’ electric vehicles, this trend invites a whole new set of problems. The batteries required to power these electric vehicles require minerals such as copper, lithium, cobalt, and nickel.

First and foremost, mining these minerals brings with it a whole slew of environmentally damaging activities.

Secondly, mining industry executives have been warning there is not enough copper, lithium, cobalt, or nickel for all the EV batteries that the transition would require. People need to understand the supply of these minerals is finite as is the supply of crude oil and natural gas.

These mining industry executives are not the only parties who have been sounding the alarm!

Current studies suggest one-third of the demand in 2035 is not projected to be satisfied based on investments that are currently happening. Given that prices are influenced by the law of supply and demand, we need to realize that a supply shortage will translate into price increases for these raw materials.

According to a calculation by Barron’s, the price of a basket of EV battery metals has jumped by 50% over the past year. This price increase is the result of various factors, one of which is the Western sanctions against Russia; Russia is a major supplier of such metals to Europe.

Earlier I touched upon the countries from which crude oil and natural gas are extracted and how some of these countries rank very low in the 2022 Index of Economic Freedom. Several of the countries from which the minerals are sourced for EV batteries are in Africa. This continent is fraught with poverty, corruption, and political uncertainty. It is also a continent that is currently threatened by a new sort of colonialism because of the energy transition.

Financial Review of XOM

Q1 2022 Results

On April 29, 2022, XOM reported Q1 2022 results and its Q2 2022 outlook; the earnings material is accessible here.

• CAPEX in Q1 totaled $4.9B and FY2022 CAPEX guidance is $21B – $24B.
• Cash flow from operations was $14.8B.
• The debt-to-capital ratio remains near the low end of XOM’s 20%-25% target range, while the net debt-to-capital ratio dropped to ~17%.

There is very limited benefit in reviewing these results given that XOM will be releasing Q2 2022 results on July 29. Nevertheless, I provide the following from the Q1 earnings presentation that demonstrates a solid start to the current fiscal year.

Source: XOM – Q1 2022 Earnings Presentation – April 29, 2022

Source: XOM – Q1 2022 Earnings Presentation – April 29, 2022

Credit Ratings

Risk assessment is a critical component of any investment analysis, yet it is often overlooked by so many investors. Had investors properly analyzed their potential risk exposure before investing in highly speculative companies or cryptocurrencies, we might not be reading so many stories on social media from people whose ‘investments’ have been decimated.

Where possible I check if the major rating agencies have assigned ratings to a company’s domestic long-term unsecured debt. This form of debt carries more risk than secured debt but is less risky than owning common shares. It is, therefore, important, that equity investors account for this higher risk. If a company’s domestic long-term unsecured debt is rated at the lowest tier of the lower medium grade investment-grade category, for example, then a common shareholder’s risk is a non-investment grade (speculative).

XOM’s current domestic long-term unsecured debt ratings and outlook are:

• Moody’s: Aa2 (stable) last reviewed March 2021 at which time this rating was downgraded from Aa1
• S&P Global: AA- (stable) last reviewed May 2022. This rating was downgraded from AA in February 2021.

The rating assigned by Moody’s is the middle tier of the high-grade investment-grade category. It is one tier above the rating assigned by S&P Global.

Both ratings define XOM as having a very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.

Dividends and Share Repurchases

Dividends and Dividend Yield

XOM experiences periods in which its operating results are weak with weak revenue and earnings like in FY 2020.

Source: Portfolio Insight*

Source: Portfolio Insight*

Nevertheless, it consistently distributes a quarterly dividend although dividend increases can be muted, like in FY 2020 and FY 2021. In FY2020, XOM borrowed heavily with some of the borrowings being applied toward the distribution of the company’s dividend because of the COVID-19 pandemic. However, unlike many energy companies, XOM did not cut or omit its dividend despite low dividend safety. A further testament to dividend is demonstrated by the 100+ year dividend streak.

Source: Portfolio Insight*

XOM distributed dividends of $9.02B, $10.092B, $10.875B, $11.568B, $12.09B, $12.453B, $13.001B, $13.798B, $14.652B, $14.865B and $14.924B in FY2011 – FY2021. In Q1 2022 it distributed $3.76B versus $3.72B in Q1 2021.

XOM’s most recent $0.88 quarterly dividend was distributed on June 10, 2022. This distribution marks the 3^rd consecutive quarterly dividend at this level.

With shares having closed at ~$86 on July 8, according to Portfolio Insight*, the dividend yield is ~4.1%. As a Canadian resident, I incur a 15% dividend withholding tax on the dividends I receive from XOM shares held in taxable accounts thus lowering the dividend yield to ~3.5%.

Source: Portfolio Insight*

I expect XOM will generate strong results in FY2022 and for at least the next couple of years. I, therefore, envision no issue with its ongoing ability to service its dividend. Furthermore, XOM may reward its shareholders during this period with higher dividend increases.

Share Repurchases

XOM’s track record of share repurchases has been exceptionally weak since FY2015. In FY2011 – FY2021 it repurchased $22.055B, $21.016B, $15.998B, $13.183B, $4.039B, $0.977B, $0.747B, $0.626B, $0.594B, $0.405B, and $0.155B. In Q1 2022 it repurchased $2.067B versus $1B in Q1 2021.

The weighted average number of issued and outstanding shares in FY2011 – FY2021 is $4.876B, 4.628B, $4.419B, 4.282B, 4.196B, 4.177B, 4.256B, 4.270B, 4.270B, 4.271B, and 4.275B. In Q1 2022 there were 4.213B shares outstanding versus 4.234B in Q1 2021.

When XOM provided its Corporate Plan Update in December, the outlook included share repurchases of ~$10B in FY2022. On April 29^th, however, XOM announced a ~$20B increase to ~$30B in total through 2023, rewarding patient shareholders.

Valuation

In FY2022, XOM generated $5.39 in diluted EPS. Using the current ~$86 share price, XOM’s diluted PE is ~16 based on trailing earnings.

In Q1, XOM generated $1.28 in diluted EPS. I anticipate another 3 solid quarters and taking into account the proposed share repurchases, I envision FY2022 diluted EPS of at least $7. This would give us a forward diluted PE of ~12.2 based on the current share price.

There is considerable variance in the guidance from the brokers which cover XOM. Using their adjusted diluted earnings estimates, we get the following forward adjusted diluted PE levels.

• FY2022 – 25 brokers – mean of $11.16 and low/high of $8.75 – $13.69. Using the mean estimate, the forward adjusted diluted PE is ~7.7.
• FY2023 – 24 brokers – mean of $9.69 and low/high of $6.94 – $14.63. Using the mean estimate, the forward adjusted diluted PE is ~8.9.
• FY2024 – 16 brokers – mean of $8.02 and low/high of $5.30 – $10.12. Using the mean estimate, the forward adjusted diluted PE is ~10.7.
• FY2025 – 6 brokers – mean of $7.04 and low/high of $6.22 – $8.47. Using the mean estimate, the forward adjusted diluted PE is ~12.2.

Only 6 brokers have provided estimates for FY2025. Furthermore, much can change between now and FY2025. I, therefore, am very reluctant to place any reliance on estimates beyond FY2023.

I expect the remainder of the current fiscal year to be as strong, if not stronger, than Q1. It is not unreasonable to expect XOM to generate at least $45B in FCF; it generated $10.843B in Q1. With 4.213B shares outstanding in Q1 and XOM ramping up its share repurchases, it is quite possible the weighted average share outstanding in FY2022 could be ~4.1B. Divide $45B in FY2022 FCF by 4.1B of shares outstanding and we get FY2022 FCF/share of ~$11. With shares trading at ~$86, we get a forward Price/FCF share valuation of ~7.8.

I consider XOM to be attractively valued and patient shareholders may be rewarded as the company’s valuation increases.

Exxon Mobil (XOM) Shareholders Are Finally Being Rewarded – Final Thoughts

I readily admit that having been a XOM shareholder for several years has tested my patience. The saving grace is that I have automatically reinvested all my dividends to acquire additional shares at attractive prices. Now, XOM shareholders are finally being rewarded!

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