ExxonMobil(NYSE: XOM) has come a long way over the last five years. The oil behemoth has transformed into a much more profitable company. It delivered industry-leading profitability during the third quarter, enabling it to provide its shareholders with industry-leading cash returns.
On its third-quarter conference call, CEO Darren Woods shared the secrets to the company's success and explained how it has become the most profitable company in the oil patch.
Transforming the earnings power of the company
Woods started ExxonMobil's third-quarter call by highlighting that the company "announced earnings of $8.6 billion this morning, one of our best third quarters in the past decade." That came during a period when commodity prices weren't all that high. Brent oil (the global benchmark price) averaged $80 per barrel during the quarter, about $5 lower than it was during the second quarter and roughly in the middle of its range over the past decade. While natural gas prices were higher in the quarter, refining margins were at the low end of their range from 2010 to 2019 (a period that the company notes was lacking in outliers), and chemical margins were well below their 2010 to 2019 range.
Because unusually high commodity prices didn't fuel the strong quarter, Woods had the opportunity to highlight the company's ongoing transformation. "Even more importantly, this quarter's results continue to demonstrate how our enterprisewide transformation is improving the earnings power of the company," he said.
He then provided a specific example, highlighting the refining business:
In 2024, year-to-date earnings are roughly double what they were in the same period of 2019 on a constant-margin basis. For all of our businesses, we've been focused on reduced cost, high-return investments, and selected divestments to improve profitability, particularly in bottom-of-cycle conditions. This work has fundamentally transformed our refining business.
The energy giant has gone from operating 45 refineries at the time of Exxon's merger with Mobil to 15 today. However, those 15 are "advantaged by location and configuration," which enables the company to significantly improve its product yield. It has also stripped out $5 billion of structural costs from this business since 2019.
More improvements ahead
Woods has been guiding ExxonMobil under a corporate plan aimed at doubling its earnings potential from 2019's level by 2027. That plan has several aspects, including:
- Investing $22 billion to $27 billion annually through 2027 into high-return capital projects (i.e., those that can generate average returns of 30% with payback periods of less than 10 years).
- Investing more than $20 billion of this capital into lower emissions opportunities.
- Capturing $15 billion of structural cost savings.
- Returning significant cash to shareholders through a growing dividend and a meaningful share repurchase program that is targeting $20 billion of stock buybacks in 2025).
ExxonMobil also plans to optimize its portfolio by selling less-advantaged assets and recycling that capital into higher-return opportunities. For example, this year, the company sold non-core properties in the Permian Basin, Argentina, Nigeria, and Malaysia. Meanwhile, it closed its megamerger with Pioneer Natural Resources, significantly enhancing its core position in the Permian.
This combination of high-return investment spending and cost savings initiatives should enable ExxonMobil to continue enhancing its underlying profitability. The company believes it can deliver $14 billion of further earnings and cash flow growth by 2027 from last year's level. The oil company intends to continue to invest heavily in developing its advantaged upstream assets, driven by the Permian, Brazil, and Guyana, and expanding its footprint in liquefied natural gas. The energy giant also has several projects under construction across its product solutions portfolio that should grow its volumes and margins in the coming years. Finally, ExxonMobil expects to capture the remaining $3.7 billion of its $15 billion structural cost savings target.
Growing better
ExxonMobil has fundamentally transformed into a much more profitable company by focusing on investing in its best assets while also streamlining its cost structure. That enabled the oil giant to deliver one of its best third-quarter profits in the past decade without a notable boost from commodity prices. With more improvements ahead, ExxonMobil should grow even more profitable in the future. That makes it a compelling long-term investment in the oil patch.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
