Exxon Mobil Corp. (XOM, Financial), based on float adjusted market capitalization, is the world’s largest energy company. While size in most industries works against most companies because it indicates growth is going to be hard to achieve, size turns out to be a key differentiator for the company.
Last year, its annual profit recorded a historic high of nearly $56 billion, yet the company has been on a multiyear effort to restructure its business. Exxon Mobil is aiming to save $9 billion in annual costs by the end of this year, compared with 2019. The company said at the start of the year it was on track to cut another $2 billion this year on top of $7 billion in savings it has made through changes in how its businesses are organized. For example, it put its refining and chemicals businesses together last year.
Company structure and earnings
Exxon Mobil reports four segments not including the Corporate and Financing segment. The Upstream segment is organized and operates to explore for and produce crude oil and natural gas. The Energy Products, Chemical Products and Specialty Products segments are organized and operate to manufacture and sell petroleum products and petrochemicals.
Its U.S. GAAP earnings for each segment in 2022 were as follows:
- Upstream: $36.5 billion
- Energy Products: $15 billion
- Chemicals: $3.5 billion
- Speciality Products: $2.4 billion
- Corporate and Financing: -$1.7 billion
So clearly Exxon Mobil is an oil and gas company at heart. The main drivers of its performance are going to be oil and gas prices, but that is the same for all energy producers.
Exxon's unique approach
In May 2021, an activist investment firm called Engine No. 1 argued Exxon Mobil Corp was stuck in the past as it was refusing to invest in clean energy. In a proxy fight, Engine No 1, with support of large institutional investors, won three seats on the company's board. This has set it on a slightly new trajectory. Unlike Shell (SHEL, Financial) and BP (BP, Financial), Exxon Mobil is not investing in electricity generation and supply. It is not rebranding itself as an “integrated energy company” supplying both molecules and electrons. Instead, it is sticking very much to its traditional oil and gas markets.
Yet the difference is that Exxon Mobil has now set up a low-carbon solutions business and while this business still sits within the Corporate and Financing segment of its results, the business has significant potential. As such, the company is laser-focused on turning this business into an important profit center.
Low carbon solutions spotlight
In an investor presentation in April, Exxon Mobil CEO Darren Woods, Chief Financial Officer Kathryn Mikells and president of the newly formed Low Carbon Solutions business Dan Ammann walked investors through this new business unit. Woods said, “The world’s climate challenge is immense and the opportunity it creates is equally immense.”
The goal of this new business is “accelerating the world’s path to net zero and building a compelling new business.” Exxon Mobil will initially focus on the molecules side of low carbon markets: carbon capture and storage, hydrogen and biofuels. This will be focused on industrial sectors, as these generate 8 times the emissions relative to light duty transport. The company has strong relations with industrial sectors through its large natural gas and chemicals businesses, and Exxon Mobil intends to leverage these relationships.
Exxon Mobil believes that unlocking the opportunity will be driven by improved policy and regulation and growing market incentives along with improving technology and economies of scale that will reduce the cost of emissions abatement. This is already happening with the Inflation Reduction Act.
Exponential growth potential
Exxon Mobil illustrated its growth targets for Low Carbon Solutions by showing three phases and indicative timeframes. In the first five years, under current conditions, the company's revenue potential could be in the billions of dollars. In years five through 10, with technology scaling and new technologies, and more supportive conditions, Exxon's revenue potential could be in the tens of billions of dollars. Finally, in the longer term, with societal emissions declining to net zero, Low Carbon Solutions' revenue potential is seen to be in the hundreds of billions. Ammann said the business could one day grow to be “larger than Exxon Mobil Corp's base business is today as the world approaches net zero.”
Return on investment
Exxon Mobil believes the representative range of return on average capital employed (ROCE), for its capabilities and opportunity set in Low Carbon Solutions is between 10% and 20%, with the long-term contracts on offer and the less cyclical nature of the business model providing higher earnings stability. This compares with the similar returns on investment in oil and gas, but which are far more volatile depending on where in the cycle the oil and gas markets are.
Zero to one: carbon capture and storage
In Louisiana, Exxon Mobil is progressing its foundation Carbon Capture and Storage project with CF Industries Holdings Inc. (CF, Financial). The project is expected to capture 2 million tons a year of carbon dioxide from CF Industries' Donaldsonville facility, and startup is targeted for 2025. That is equivalent to replacing 700,000 gas-powered cars with electric vehicles. In other words, this one project at one facility will have a bigger impact than all the EVs sold in the U.S. last year.
Exxon Mobil has also entered into another landmark commercial offtake agreement with Linde PLC (LIN, Financial) to capture, transport and permanently store up to 2.2 million metric tons of CO2 annually. It is not hard to imagine the company leveraging this for future potential activity at its nearby Beaumont site, and it will be looking to partner other third-party emitters across the Gulf of Mexico energy corridor – where Exxon Mobil itself is a huge player.
Mergers and acquisitions
On July 13, Exxon Mobil announced it entered into a definitive agreement to acquire Denbury Inc. (DEN, Financial) through an all-stock transaction with an estimated value of $4.9 billion. The acquisition further accelerates the corporation’s low carbon solutions opportunities.
Denbury is seen as an emerging star in carbon capture technology, and owns important infrastructure including CO2 sequestration facilities, transport pipelines and storage concentrated along the coast of the Gulf of Mexico.
Management and investment plans
Exxon plans to invest approximately $17 billion in lower-emission energy solutions through 2027. This will be headed up by Ammann, who joined the company from Cruise, an autonomous vehicle company majority-owned by General Motors Co. (GM, Financial), where he was named CEO in 2018.
Conclusion
Exxon Mobil is following a focused molecules strategy, but one that recognizes that low carbon solutions is an attractive business opportunity. This gives the company a unique growth leg that most other energy companies won’t be able to monetize. After years of uncertainty, the new strategy should set it up to retain its place as the world’s preeminent energy company.
