Exxon Mobil Trims Spending and Defends Dividend

Exxon Mobil XOM held its annual analyst day and as is typical, it held little new news, in large part because most strategic guidance items, including a reduction in long-term spending, were updated previously. But also, because Exxon did not announce a pivot away from its core oil and gas business as many peers have. While this might leave activist investors disappointed, we think it's the right move and should lead to near-term outperformance, if not longer. Our fair value estimate and narrow moat rating are unchanged, leaving Exxon as our Best Idea in the sector. The updated plans include capital spending of $16 billion-19 billion this year and $20 billion-25 billion through 2025. Volumes will hold steady at 3.7 million barrels of oil equivalent per day, instead of growing to 5 mmboe/d as its previous plan called for. Exxon, however, can still grow earnings meaningfully (to about $25 billion annually by 2025), albeit not to its prior target (doubling 2017 earnings to about $30 billion annually). This is despite the lower spending due to the contribution of structural cost reductions, portfolio improvements and if downstream and chemical margins return to previous highs, assuming $55/bbl Brent. Exxon already reduced structural costs by $3 billion last year and plans to cut another $3 billion or more by 2023. Although volumes won't grow, overall portfolio profitability should improve thanks largely to high-margin Guyana volumes backfilling those lost to a 50% decline in North American dry gas production and lower-value divestments.

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