It's no surprise that ExxonMobil (XOM +0.46%) is not getting much love from Wall Street. The company's 2019 earnings fell, largely due to lower oil and gas prices. Moreover, its downstream and chemical earnings, which should grow when oil prices are lower, also fell in 2019 due to lower margins and higher downtime. However, that should not make you write-off the stock. There are several key factors that make this beaten-down giant attractive.
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Production growth
After falling for three consecutive years, ExxonMobil's oil-equivalent production rose in the year 2019. The growth was driven by increased liquids production, even as natural gas production volumes declined. The higher volumes favorably contributed to the company's earnings for the year. Moving ahead, as ExxonMobil's projects, including those in Guyana and Permian Basin, reach their full capacity, they will continue to contribute to the company's earnings.
Data source: ExxonMobil. Chart by author.
Population and economic growth continue to support oil and gas demand fundamentals in the longer-term. ExxonMobil's investments set it for stronger performance as the industry rises from the trough of the current price cycle. With significant scheduled maintenance behind, ExxonMobil's downstream earnings too should improve, contributed by improved margins from higher-value products and newer projects.
Debt and cash flows
ExxonMobil's rising debt levels is another top concern of investors. The company's total debt rose from $37.8 billion at the end of 2018 to $46.9 billion at the end of 2019. The company invested in some key growth projects during the year resulting in the rise in its debt. However, even with the higher debt, ExxonMobil's leverage levels are much lower than most of its peers.
ExxonMobil generated cash flows of $29.7 billion from operating activities during the year. The company spent $26.8 billion in property, plant, and equipment (PP&E) additions and net investments and advances. It generated $3.7 billion in proceeds from asset sales during the year. So, ExxonMobil generated free cash flows of $6.6 billion in 2019, which don't cover its $14.6 billion dividends for the year -- a point of concern for investors.
However, the equation should change as the company's investments over the last few years start adding to its cash flows. From 2019 to 2025, ExxonMobil expects to pay around $100 billion in dividends. The company expects to generate $190 billion in free cash flow during this period, based on a $60 per barrel flat Brent price scenario, resulting in ample available capacity to use for investments, dividend growth, share buybacks, or reduce debt.
ExxonMobil's growth plans
ExxonMobil is doing two things to fuel growth. One, it is investing in key capital projects, including in Guyana and the Permian Basin, that would significantly add to its earnings. Two, it is divesting assets that aren't a good fit for the company's growth plans. This will free-up capital to invest in projects that are expected to create more value for the company. ExxonMobil plans to divest $15 billion in non-strategic assets by 2021. Earnings from new projects will more than replace that from divested assets.
Stock on sale?
Though ExxonMobil is making significant investments, I don't expect exponential growth in the company's earnings anytime soon, unless oil prices rise significantly from their current levels. That doesn't look too likely. However, as long as oil prices don't fall freely as happened in 2014, the company's growth plans should work out well. That should help the company grow its earnings steadily, supporting the stock's price as well as its more than 5% yield.
