XOM is undervalued and will protect against inflation

Since I made a post about $OXY I thought I would venture into the world of other energy E&P operators that I think are likely to outperform the broader index of energy names.  First off, the energy names are unloved for a couple of reasons and while they have lower volume that leads to more volitile moves in share price. XOM is a major, which means they are a fully integrated Oil and Gas operator from top to bottom. The find the resource, refine, and deliver it to whomever is willing to buy it. Currently to understand any E&P we need to understand the macro environment. OPEC+ (the oil and gas cartel of the world) stated that we are at 3M BOPD for supply growth in 2022 with demand expected to average 4.1M BOPD. Supply consistently throughout 2021 has lagged demand. BP was quoted yesterday saying that we have reached pre-pandemic 100M BOPD demand threshold. This magic number has been thrown around consistenly in the energy sector as the holy grail. "If only we can get back to 100M BOPD then we will be fine." What is actually more worrisome is where the next incremental barrel will come from if OPEC+ spare capacity is actually 2-3M BOPD. Some analysts have speculated that OPEC+ has overstated its spare capacity to produce oil. That alongside with other factors has led analysts to watch the moves of OPEC+. Heres a great example.  Recently, Putin told Europe that he would supply the Europeans with gas so that the prices would come down from outrageous prices however, since that statement Gazaprom has yet to supply the normal amount to the termial through Ukraine. Main speculation is that the NORD Stream II pipeline that was built directly to Germany was under review by the EU. Due to Ocrams razor we can think that there is a easier solution which happened to appear on social media from the main terminal to process the gas in Russia. It caught on fire and was spewing 30,000 MCF from the top of the building causing a shutdown of the plant. Thus leaving Russia to fill its own reserves of gas and not being able to send any to the EU.  This is why ever number reported by OPEC+ needs to be taken with a grain of salt. (Not to mention that Nigeria just had a huge spill that needs to be cleaned up). Now with those factors in mind lets take a look at the comapny in mind, XOM.  XOM has mutiple areas of great production on the Upstream side. First off, they have mutiple large offshore platforms and recently announced they have enough reserves found to keep drilling until 2030 from the same area in Guyanna. That to me is a good prospect for the future inventory. (Also there are rumors that a 4th rig is being discussed to move to Guyanna.) Secondly, they have onshore production in the Permain Basin. While their individual well meterics are not as good as some of their competitors, XOM drills every possible bench all at once known as cube development. This leads to lower costs per well and higher total recovery from the drilling unit overall. These wells payout in the current environment 3-4 months on average and they experience hyperbolic decline but will produce 2/3 of their oil in the first 2-3 years. That will help keep XOM on track in the short term.  Thirdly, distribution. XOM can realize market inefficiencies from other markets while the other E&P's (excluding other Majors) cannot. XOM pays the mineral owner in west texas the highest price for both oil and gas because they can get higher prices across the world. Currenly Henry Hub in the US is at $5.13 per MCF while over in the EU it is $31.05 per MCF (and was higher recently). Additionally, XOM has started work with China on a foreign owned refinery. This will lead to more oil going to China for gasoline and other products. AKA XOM prod -> XOM refine -> XOM sales. This vertical integration is what saves costs over time.  Now lets talk about fundamentals.  XOM reported earnings a couple weeks ago. Given the commodity price every analyst knew they would generate a postive upside on EPS. The only question was how much. XOM beat expectations on both Revenue $73.79B (by only $2.09B) and EPS $1.58 (by $0.06). XOM then laid out the future tasks in the upcoming quarters. This is why XOM will be worth $80 per share.  #1 Pay down debt from the previous year #2 Increase Dividend  #3 Share buybacks of $10B During the quarter XOM paid $4B down in debt, increased the dividend by $0.01 and increases in ESG will put XOM back into the institutional cashflow investors eye.  Currently, XOM is at $64.34 at the time of writing this with analysts ranging from $65-$90 per share with the average consensus around $75 per share. I expect that with the upcoming return of airline demand from Christmas due to pent up demand, we will see a boom of oil demand. Currently at 100M BOPD that is with airlines under performing in terms of demand however airlines have been writing contracts to increase their supply of jet fuel in preparation from the upcoming season. The writing is on the wall in terms of return to normalcy. Put differently, for every $1 increase in oil price we should see an equal increase in XOM share price. (Levered to oil) Just like any commodity stock, these will go hand in hand.  Prediction time: I think that we will see an increase in share price over the next quarters due to the realization by the market that XOM is worth more when the commodity that they interact with is higher. Also, the current environment around ESG has taken some of the wind out of the sails but eventually XOM will be seen for what it is, a cash printing machine. My price target is based on likelyhood of oil increase past spare capacity and the world experiencing a colder than average winter sending LNG prices to the moon. Thus I think XOM will be at $90 per share by Q3 of next year. (Maybe too agressive but why not.)

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XOM is undervalued and will protect against inflation

bullish

Since I made a post about $OXY I thought I would venture into the world of other energy E&P operators that I think are likely to outperform the broader index of energy names. 

 

First off, the energy names are unloved for a couple of reasons and while they have lower volume that leads to more volitile moves in share price. XOM is a major, which means they are a fully integrated Oil and Gas operator from top to bottom. The find the resource, refine, and deliver it to whomever is willing to buy it.

Currently to understand any E&P we need to understand the macro environment. OPEC+ (the oil and gas cartel of the world) stated that we are at 3M BOPD for supply growth in 2022 with demand expected to average 4.1M BOPD. Supply consistently throughout 2021 has lagged demand. BP was quoted yesterday saying that we have reached pre-pandemic 100M BOPD demand threshold. This magic number has been thrown around consistenly in the energy sector as the holy grail.

"If only we can get back to 100M BOPD then we will be fine."

What is actually more worrisome is where the next incremental barrel will come from if OPEC+ spare capacity is actually 2-3M BOPD. Some analysts have speculated that OPEC+ has overstated its spare capacity to produce oil. That alongside with other factors has led analysts to watch the moves of OPEC+. Heres a great example. 

Recently, Putin told Europe that he would supply the Europeans with gas so that the prices would come down from outrageous prices however, since that statement Gazaprom has yet to supply the normal amount to the termial through Ukraine. Main speculation is that the NORD Stream II pipeline that was built directly to Germany was under review by the EU. Due to Ocrams razor we can think that there is a easier solution which happened to appear on social media from the main terminal to process the gas in Russia. It caught on fire and was spewing 30,000 MCF from the top of the building causing a shutdown of the plant. Thus leaving Russia to fill its own reserves of gas and not being able to send any to the EU. 

This is why ever number reported by OPEC+ needs to be taken with a grain of salt. (Not to mention that Nigeria just had a huge spill that needs to be cleaned up).

Now with those factors in mind lets take a look at the comapny in mind, XOM. 

XOM has mutiple areas of great production on the Upstream side. First off, they have mutiple large offshore platforms and recently announced they have enough reserves found to keep drilling until 2030 from the same area in Guyanna. That to me is a good prospect for the future inventory. (Also there are rumors that a 4th rig is being discussed to move to Guyanna.)

Secondly, they have onshore production in the Permain Basin. While their individual well meterics are not as good as some of their competitors, XOM drills every possible bench all at once known as cube development. This leads to lower costs per well and higher total recovery from the drilling unit overall. These wells payout in the current environment 3-4 months on average and they experience hyperbolic decline but will produce 2/3 of their oil in the first 2-3 years. That will help keep XOM on track in the short term. 

Thirdly, distribution. XOM can realize market inefficiencies from other markets while the other E&P's (excluding other Majors) cannot. XOM pays the mineral owner in west texas the highest price for both oil and gas because they can get higher prices across the world. Currenly Henry Hub in the US is at $5.13 per MCF while over in the EU it is $31.05 per MCF (and was higher recently). Additionally, XOM has started work with China on a foreign owned refinery. This will lead to more oil going to China for gasoline and other products. AKA XOM prod -> XOM refine -> XOM sales. This vertical integration is what saves costs over time. 

Now lets talk about fundamentals. 

XOM reported earnings a couple weeks ago. Given the commodity price every analyst knew they would generate a postive upside on EPS. The only question was how much. XOM beat expectations on both Revenue $73.79B (by only $2.09B) and EPS $1.58 (by $0.06). XOM then laid out the future tasks in the upcoming quarters. This is why XOM will be worth $80 per share. 

#1 Pay down debt from the previous year

#2 Increase Dividend 

#3 Share buybacks of $10B

During the quarter XOM paid $4B down in debt, increased the dividend by $0.01 and increases in ESG will put XOM back into the institutional cashflow investors eye. 

Currently, XOM is at $64.34 at the time of writing this with analysts ranging from $65-$90 per share with the average consensus around $75 per share. I expect that with the upcoming return of airline demand from Christmas due to pent up demand, we will see a boom of oil demand. Currently at 100M BOPD that is with airlines under performing in terms of demand however airlines have been writing contracts to increase their supply of jet fuel in preparation from the upcoming season. The writing is on the wall in terms of return to normalcy. Put differently, for every $1 increase in oil price we should see an equal increase in XOM share price. (Levered to oil) Just like any commodity stock, these will go hand in hand. 

Prediction time:

 

I think that we will see an increase in share price over the next quarters due to the realization by the market that XOM is worth more when the commodity that they interact with is higher. Also, the current environment around ESG has taken some of the wind out of the sails but eventually XOM will be seen for what it is, a cash printing machine.

My price target is based on likelyhood of oil increase past spare capacity and the world experiencing a colder than average winter sending LNG prices to the moon. Thus I think XOM will be at $90 per share by Q3 of next year. (Maybe too agressive but why not.)

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90.00

Target Price

8/ 10

Confidence

6-12 Months

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