Exxon Mobile Stock: Entering A Period Of Higher Capital Returns (NYSE: XOM)

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ExxonMobil Baytown Olefins plant in Baytown, near Houston, Texas, USA

michelmond / iStock Editorial via Getty Images

Exxon Mobil (XOM) benefited from rising petroleum prices in the fourth-quarter. The petroleum company reported record free cash flow for FY 2021 and free cash flow is set to grow further as petroleum prices close in on $ 100-barrel. The company recently announced a massive $ 10B share buyback and Exxon Mobil will also likely grow its dividend rapidly this year. Exxon Mobil remains a buy as shares are still undervalued based off of free cash flow!

A fantastic fourth quarter to end a fantastic year

2022 was truly a great year for Exxon Mobil as well as the entire fossil fuel industry. The post-pandemic economic recovery has led to a surge in petroleum demand and rising prices which fueled Exxon Mobil’s free cash flow growth. Improved pricing in end-markets was the chief reason behind the company’s surging earnings and free cash flow, not only in Q4’21, but the entire FY 2021. Pricing effects added $ 15.9B of additional earnings in FY 2021 that Exxon Mobil was not able to record in FY 2022. Total earnings for FY 2021 were $ 23.0B, showing a massive increase over FY 2020 where the company made a loss of $ 1.4B. Pricing strength in end-markets could drive record profitability for Exxon Mobil this year.

ExxonMobil Earnings FY 2021 - contributing factors to change in earnings chart

ExxonMobil

Free cash flow could set a new record in FY 2022… if pricing remains strong throughout the year

In my last work on Exxon Mobil I predicted that the petroleum company would crush earnings and free cash flow expectations for FY 2021 because of the strong post-pandemic market recovery in the energy sector. Specifically, for Q4’21, I expected Exxon Mobil to generate $ 13B in operating cash flow and around $ 10B in free cash flow. This free cash flow estimate for Q4’21 was set to result in total FY 2021 free cash flow of around $ 32.6B. In my predictions for Q4’21 free cash flow I assumed a stable operating-cash-flow-to-free-cash-flow conversion of approximately 75%. The actual conversion was 88%, much better than expected. And free cash flow for Q4’21 was $ 15.1B, also much better than anticipated …

2021

2020

$ B

Quarter 4

Quarter 3

Quarter 2

Quarter 1

Quarter 4

Cash Flow from Operating Activities

$ 17.1

$ 12.1

$ 9.7

$ 9.3

$ 4.0

Proceeds from Asset Sales

$ 2.6

$ 0.0

$ 0.3

$ 0.3

$ 0.8

Cash Flow from Operations and Asset Sales

$ 19.7

$ 12.1

$ 9.9

$ 9.6

$ 4.8

PP&E Adds / Investments & Advances

($ 4.6)

($ 3.1)

($ 3.0)

($ 2.7)

($ 4.1)

Free Cash Flow

$ 15.1

$ 9.0

$ 6.9

$ 6.9

$ 0.7

(Source: Author)

Operating cash flow for the entire year was at $ 48.1B, the highest in a decade. Free cash flow of $ 38B covered all debt payments and distributions going to shareholders.

ExxonMobil Cash Flow FY 2021 chart

ExxonMobil

My prediction for Q4’21 free cash flow was based on a petroleum price of $ 85-barrel. Today, crude oil trades about $ 10-barrel higher, at $ 95-barrel, and it looks as if prices have further room to grow. This is because the demand situation for petroleum remains strong.

Oilprice.com Crude Price trend chart

Oilprice.com

For FY 2022, I expected between $ 35B to $ 40B in free cash flow, assuming that petroleum prices remained above $ 80-barrel. With crude oil closing in on $ 100-barrel, Exxon Mobil could materially grow its free cash flow in FY 2022 and I can see free cash flow settling between $ 45B and $ 50B, assuming that pricing strength in end-markets will support Exxon Mobil throughout the year. Based off of refreshed FY 2022 free cash flow estimates for the full-year, shares of Exxon Mobil have a 7 X – 8 X P-FCF ratio. Although Exxon Mobil’s price has gone up after delivery of the Q4-21 earnings sheet, shares of the energy firm have actually become cheaper due to improving free cash flow prospects.

$ 10B share buyback, dividend growth

Exxon Mobil announced a $ 10B share buyback which will begin in the first quarter of 2022. The firm is going to repurchase $ 10B worth of its shares over the next one to two years, which could help shares of Exxon Mobil to revalue higher.

More important than share buybacks, at least for me, are increases in the regular dividend rate. Because of Exxon Mobil’s improving free cash flow situation, investors should be looking forward to receiving a generous dividend raise in FY 2022. In Q4’20, Exxon Mobil raised its dividend only by $ 0.01, which is better than nothing, but the raise was below the average of previous years.

Exxon Mobile <span class =

Risks with Exxon Mobile

The big risk with Exxon Mobil, as I see it, is that petroleum markets enter another bear market. This is not to say that I see a bear market on the horizon, it is just that Exxon Mobil has failed to deliver competitive investment returns during periods of falling petroleum prices. In the absence of a petroleum bear market, shares of Exxon Mobil are set to do well, especially as long as free cash flow remains as strong as it is now. A material decline in free cash flow, likely precipitated by weaker end-market pricing and falling petroleum demand, would be a warning signal and indicate falling capital returns in the near future.

Final thoughts

Exxon Mobile is still undervalued. The $ 10B share buyback is very good for shareholders, but I would prefer if the company returned to growing its dividend more rapidly. Given the massively improved free cash flow position of Exxon Mobil in 2021, the firm could hand investors a nice dividend raise this year. Investors are looking at a period of higher capital returns, and it could help power shares of Exxon Mobil even higher!



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