Capital allocation discussions between Exxon Mobil CEO Darren Woods, the management team and the company’s remade board could end up being tough in the years ahead.
Photo: Jacquelyn Martin/Associated Press
A bruising pandemic and an activist-led board makeover later, Exxon Mobil Corp. XOM 6.41% is back. Well, almost.
The largest surviving Standard Oil descendant reported on Tuesday that it generated $23 billion in profit in 2021, more than reversing its $22 billion loss from 2020. It isn’t surprising that oil majors would be doing better: Oil prices, which briefly went negative in 2020, rebounded to average more than $70 a barrel in 2021. Even then, Exxon surprised Wall Street with the size of its recovery. It generated $48 billion in cash flow from operating activities, the highest since 2012, when global oil prices averaged more than $100 a barrel. That number is also about $4 billion more than what analysts polled by Visible Alpha expected.
Much of that is thanks to all the cost reductions and efficiencies Exxon racked up over the years and especially in 2020, when it dramatically slashed the size of its workforce. The company on Monday said it plans to streamline the organization more and by 2023 it expects more than $6 billion worth of annual cost savings compared with 2019, about 40% of Exxon’s expected dividend payout this year. Investors liked what they heard: Exxon’s shares jumped 6% after the earnings call Tuesday. Its enterprise value as a multiple of forward earnings before interest, taxes, depreciation and amortization still remained 14% cheaper than pre-pandemic levels, though.
Exxon has been talking a lot about the potential of its low-carbon solutions business after activists remade its board last May, but the strong results underscore just how profitable the emissions-heavy business can be during the good times. Exxon’s chemicals unit, which according to its own disclosures has the most greenhouse-gas emissions per metric ton of throughput or production, had its most profitable year in 2021, almost 60% more than its prior record set in 2010. That means capital allocation discussions—between Chief Executive Darren Woods, the management team and the remade board—could end up being tough in the years ahead, especially as oil prices remain high enough to be tempting. The company plans to unveil more details at its investor day in March.
It is certainly good news that Exxon is taking investor feedback to heart, but another point of concern going forward could be that investors themselves demand too much cash back before Exxon’s balance sheet is fully restored. Even after having slashed $20 billion worth of debt compared with 2020, Exxon’s total debt-to-capital ratio remains higher than its 10-year average and also above peer Chevron’s . Its goal of reaching a 20% ratio seems pretty unambitious compared with its historical levels.
Exxon is off to a great start in 2022, but its makeover isn’t over yet.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
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Appeared in the February 2, 2022, print edition as ‘Exxon Mobil’s Gusher of Cash Means Tough Decisions.’
