Shareholders haven’t liked my past negative articles on Exxon Mobil (XOM) despite clear evidence the energy giant has a failed capital strategy. The stock has failed to generate the returns of both the S&P 500 index and other energy giants over the last decade. Despite the failed returns and my warnings, Exxon Mobil continues to aggressively push into more oil discoveries and production with the surge in Guyana to the detriment of the company.
On January 28, the stock hit decade-long lows at $64.63. Most investors are so focused on the 5.4% dividend yield, the average person missed the weak total returns of the related stock.
According to Bloomberg, Exxon Mobil failed miserably in the last decade. The stock had a total return of 37% while the S&P 500 index was up 263%. Even Chevron (CVX) did far better with a 117% return. Maybe investors will heed my warnings with this ugly graphic from a reputable financial media source.
Of course, past returns are not an indication or guarantee of future returns. Sometimes, the weakest stock of a previous decade rebounds for strong returns in the next decade. The key is the company having a catalyst or change in strategy to generate better returns in the next decade.
Guyana Overpouring With Oil
Earlier this week, Exxon Mobil along with partners Hess (HES) and Cnooc (CEO) announced the 2 billion increase in the oil-equivalent barrels of the Stabroek Block in Guyana. The gross discovered recoverable resource base in Guyana had now jumped to more than 8 billion Boe.
The Stabroek Block is a massive 6.6 million acres with four drillships drilling exploration wells and developing production wells. The group plans to add a fifth drillship this year with the goals of ramping up production from the area as follows:
- Liza Phase 1 – ramping to 120,000 Boe/d within months
- Liza Phase 2 – 220,000 Boe/d by mid-2022
- Payara field – 220,000 Boe/d by early 2023
- Future developments – 200,000+ Boe/d by 2025
Source: Exxon Mobil Guyana presentation
The Guyana opportunity even includes the 30 additional leads in the additional Canje and Kaieteur blocks. The oil potential appears overflowing, which isn’t good for an energy company as too much supply will flood the market and cause lower oil prices. The goal has to be balanced supply and demand.
Q4 On Tap
The energy giant will report Q4 results before the market opens on Friday, January 31. The market focus will be squarely on the cash flows the energy giant generates in the quarter and predictions for 2020 following another disappointing 2019 for the stock.
The company is forecast to earn $0.46 per share in the quarter with revenues dipping 10% to $64.4 billion. Over the last couple of years, Exxon Mobil has missed either EPS or revenues estimates nearly every quarter.
Exxon Mobil continues to promote a cash flow profile where operating cash flows increase throughout the years till 2025. The key aspect of the cash flows is the price of oil. Brent crude below $60/bbl will derail the upside potential.
Source: Exxon Mobil 2019 Investor Day
The problem with the sector for the last decade or more is this cash flow profile hasn’t been matched. The companies always promise massive cash flows in future periods based on current oil prices, but a company like Exxon Mobil has gotten to 2019 where $60/bbl oil isn’t generating the cash flows needed to cover capex and dividends.
The above cash flow chart shows how prices floating down to $50/bbl would nearly wipe out all of the upside projections of the company. The flood of 750,000 bbl of oil in Guyana is just the recipe for lower oil prices.
What the market really wants to see is how Exxon Mobil can improve cash flows without any focus on production growth. A shareholder should want to see how the company will bring production online for the right energy prices, not at any prices.
The key investor takeaway is that investors should expect decade-lows as the new norm for Exxon Mobil until the energy giant focuses on improving cash flows and reducing its reliance on asset sales to cover dividend payments. Investors should avoid the tempting 5.4% dividend yield as Q4 results on Friday should provide more of the same disappointments as the company celebrates spending more money to find more energy suppliers that aren’t needed at this point.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.