ExxonMobil (XOM 1.50%) released first-quarter results on April 26, and the report gave shareholders much to cheer about. For the period ending March 31, the company posted earnings of $8.2 billion, or $2.06 per share.
Exxon earned $11.43 billion, or $2.79 per share, in Q1 of last year. Although the recent numbers equal a 26%-28% decrease, a more noteworthy metric is that Exxon generated a whopping $10.1 billion in free cash flow, beating analysts' expectations by 21%.
By any financial measure, a $10 billion addition to its cash flow coffers is an enviable return on the company's capital expenditure (capex) outlays of $94 billion since 2019. Even though Exxon reduced capital spending by 8.5% from the prior-year period, it still returned $6.8 billion to shareholders in the form of share repurchases and dividends. The company spent $5.8 billion on capital and exploration expenditures in the just-completed quarter.
Spending on projects
CEO Darren Woods has been emphatic that the principal criterion for considering capex projects is whether they will ultimately enhance shareholder value.
A review of Exxon's projects now coming to fruition shows that its business strategy has been consistent with this goal. Most of the company's resources since 2019 have been committed to exploration and production of its offshore oil fields in Guyana as well as maximizing shale oil yields in the Permian basin in the southwestern U.S. The oil giant has minimized costs in the extraction process while boosting recoverable reserves for both projects. CFO Kathy Mikells stated that the Guyana project came on line quicker than anticipated and is currently producing 600,000 barrels a day; substantial production yields are yet to come.
Although upfront costs for offshore wells are higher than shale fields, their yield is significantly greater, which bodes well for Exxon's Guyana projects. According to Evercore ISI analyst James West, a shale well can produce 1,000 barrels of oil per day, while individual offshore wells can produce 20,000 barrels per day. The annual rate of depletion for offshore wells is typically in the single digits, versus 50% or more for the first year for shale wells.
Since 2019, Exxon has doubled production volume of shale oil in the Permian basin region. The company's $60 billion purchase of Pioneer Resources -- announced in 2023 and closed this month -- was an astute strategic decision. Exxon can now augment its existing acreage with Pioneer's valuable shale plots, which contain some of the most productive wells in the region paired with the lowest extraction costs.
The acquisition will more than double Exxon's current Permian production. By 2027, it will increase it fourfold to 2 million barrels of oil a day, accounting for almost half of its existing worldwide production. Additionally, the break-even point for many of the wells in the Permian basin is around $35 a barrel. These operational advantages will help ensure the company maintains its current abundant cash flow levels well into the future.
Planning pays off
In 2020, Exxon implemented a countercyclical growth strategy that staked its future on the continued need for fossil fuels. Meeting that goal involved seeking out long-term inventory of low-cost, high-yield oil fields that could generate stable cash flows in a variety of price markets.
Shareholders are now reaping the rewards of Exxon's unwavering commitment to this effort. Continued implementation will provide the company with a stream of stable recurring income from current as well as future production capacity of its proven reserves. TD Cowen analyst Jason Gabelman notes that Exxon's dividend is covered even if oil drops to $45 a barrel.
Global demand for oil will continue to grow for decades. European oil majors BP and Shell, both green energy stalwarts, have shifted their resource allocations toward fossil fuel production over alternate energy projects. The voracious power demands of projected artificial intelligence data centers will increase electricity demand that renewables alone can't meet. Demand for electric vehicles has stalled; hybrid sales have increased.
Woods' fervent belief in the viability of the company's capex strategy demonstrates he is a good steward of shareholders' capital. With a pristine balance sheet that reflects high cash reserves and low debt, Exxon has adequate financial heft to address the world's energy needs in the future, however diverse they may be.
