To The Moon

$Exxon Mobil(XOM)$

Exxon is one of the expensive oil producers, yet quality remains a key factor. There's significant growth potential, and I want to discuss their updated corporate plan extending to 2030. Exxon stands out as a leader in the industry, boasting no debt, exceptional assets, and a self-proclaimed "league of their own" status. While the commodity sector often follows predictable cycles, Exxon's trajectory deserves attention.

Their growth opportunities are immense, fueled by innovations in lithium, carbon materials, and oil-adjacent products. Over the past five years, shareholder distributions have been impressive, with substantial gains for those who invested during the lows. Exxon positions itself ahead of peers like BP, Chevron, Shell, and Total Energies, with plans to ramp up capital expenditures to $140 billion while maintaining a $165 billion cash surplus.

With an additional $30 billion in cash flow from new projects, Exxon is targeting annual earnings growth of 10%, delivering robust shareholder yields. By 2030, they project cash flows reaching $90 billion annually, with a market cap of less than $500 billion. Key drivers include increasing production volumes, optimizing higher-margin products, and leveraging assets in Guyana, LNG, and new technologies. Emerging businesses like lithium are expected to add $3 billion to earnings by 2030 and $13 billion by 2040.

Exxon remains disciplined in its investments, focusing on high returns and substantial shareholder distributions. Even at lower oil prices of $65 per barrel, they forecast $476 billion in cumulative cash flows by 2030. At $85 per barrel, the outlook is even stronger. Their 2025 guidance includes $30 billion in capex and $20 billion in share repurchases, underscoring their cash flow strength.

Why has Exxon thrived in the last five years, and how do they plan to replicate this success? The key factor: rising oil prices. When margins increase from $20 per barrel at $50 to $40 per barrel at $80, profits skyrocket. This favorable pricing environment has left Exxon and its peers flush with cash. While strong fundamentals and low break-even costs support their performance, much of the success hinges on these cyclical price dynamics.

When it comes to commodities, you can create detailed models and projections for Exxon, complete with cash flow calculations and presentations. Impressive? Sure. But I’m not convinced. The past five years of Exxon's cash-printing success were largely fueled by higher oil prices. The story feels all too familiar—a cycle of high investments and optimism, followed by market oversupply, resulting in years of weak performance and low returns.

Take a closer look. During the commodity boom, everyone ramps up investments. Petrobras, for instance, doubled its capital expenditures from $10 billion to $20 billion. The result? High prices lead to low prices. Add structural trends, such as reduced oil demand from China, and the risk of revenue shocks becomes real. In one year, Exxon’s revenue dropped from $364 billion in 2014 to $239 billion in 2015—a $130 billion decline. Such scenarios are rarely factored into optimistic models, but they can devastate cash flows.

If oil prices drop to $40, Exxon's free cash flow could shrink significantly—possibly by $25 billion annually. While the company may sustain its dividend, share buybacks would likely halt. Historically, buybacks for cyclical companies like Exxon have shown poor timing. They tend to buy back shares at inflated prices during booms, only to stop when prices crash. If Exxon had focused on counter-cyclical buybacks, shareholder value might have doubled.

Another risk: geopolitical dynamics. While many companies ramp up production, Saudi Arabia maintains output at 70% of its capacity, effectively supporting the current market environment. If the Saudis decide to increase production, it could disrupt the delicate balance, driving prices lower. Overproduction, declining demand, and oversupply could lead to four or five years of underwhelming performance—a typical ending for commodity cycles.

The 7% yield on Exxon may seem attractive, but the medium-term market risk is significant. I’m cautious because the cycle can turn at any moment. My approach? Wait for oil prices to crash and sentiment to sour. That’s when the risk-reward profile improves—similar to the opportunities we saw in September 2020.

Commodities are cyclical by nature, and happy endings in this sector are rare. This isn’t a Marvel or Bollywood blockbuster—it’s more like a DC Movie with a twist. Proceed with caution.

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