Breaking with integrated peers that have committed to restraining capital spending and increasing cash returns to shareholders, ExxonMobil (XOM) plans to ramp up capital spending from $24 billion this year to $28 billion in 2019 and $30 billion on average through 2025, with the goal of doubling earnings and cash flow from 2017 levels by 2025 and delivering a return on capital employed of 15% compared with 7% in 2017. While investors have been clamoring for greater capital discipline from integrated oils, Exxon’s view is that it holds a host of high-return projects that can leverage its superior integrated model and thus warrant investment.
This reasoning is sound, in our opinion. We have long argued, supported by historical returns, that Exxon is the highest-quality integrated overall and that its downstream and chemical segments are key differentiators, so it stands to reason that the company should invest to maximize those advantages. Integrated oils have a spotty record of delivering on long-dated volume and return targets, and execution risk is high. That said, Exxon is one of the better operators and developers in the world, and its plan includes a high portion of operated projects, increasing the chances for success, in our opinion. Also, while oil prices are likely to be volatile during the next seven years, Exxon can cover its spending requirements and dividends at $40 a barrel, ensuring their safety.
Allen Good, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.