Higher Commodity Prices Help Exxon Deleverage

Thanks to higher oil and gas prices Exxon’s (XOM) third-quarter earnings soared to $6.8 billion compared with a loss of $680 million last year. Operating cash flow of $11.5 billion sufficiently covered capital spending and the dividend while allowing for $4 billion in debt reduction, bringing the debt/capital ratio to 25%, in line with the management’s long-term range of 20%-25%. It announced a $10 billion repurchase program starting next year to be completed over 12-24 months while announcing a 1% dividend increase earlier in the week. Meanwhile, it reiterated its previous capital spending plans of $20 billion-$25 billion for 2022-25 while being at the low end of its $16 billion-$19 billion range for 2021.

We think Exxon’s recovery from a very tough 2020 remains in the early stages. Although earnings have improved and debt levels fallen, it has further to go. The downstream continues to underearn as margins remain below 10-year averages ranges while all other commodity price indicators have recovered, suggesting further earnings potential. Continued high commodity prices should allow for more debt reduction and potentially greater shareholder returns (dividend increases and repurchases). Exxon also remains our cheapest integrated oil based on price/fair value.

Upstream earnings increased to $4.0 billion from a loss of $383 million last year due to higher commodity prices. Production was essentially flat at 3,665/mboed compared with 3,672/mboed a year ago as an increase in liquids volumes offset lower gas volumes. Downstream earnings improved to $1.3 billion from a loss of $231 million last year as stronger margins and lower expenses. Market margins were improved during the quarter, but remain relatively weak compared with historical levels, suggesting a recovery thanks to economic improvement would act as a tailwind for Exxon.

Chemical earnings increased to $2.1 billion from $661 million last year on wider margins.