Having experienced a 11% decrease within a single month and offering a 3.7% annual yield, is this high-yield dividend stock now excessively inexpensive, warranting consideration for purchase in 2025?
ExxonMobil (XOM -0.01%) and the rest of the energy sector have experienced significant setbacks in the past month with oil prices hovering at their lowest levels in a year. However, ExxonMobil has strategic plans to boost shareholder returns, even with low oil prices.
Here's why ExxonMobil is poised to substantially enhance its earnings and cash flow in the upcoming years, making it an attractive dividend stock to invest in 2025.
A transparent blueprint for future growth
On December 11, ExxonMobil announced updates to its corporate strategy, extending its targets from 2027 to 2030.
From 2019 to the third quarter of 2024, ExxonMobil realized $11 billion in structural cost savings, boosted earnings and cash flow, reduced greenhouse gas emissions, and returned $140 billion to shareholders through buybacks and dividends. By 2030, the company aims to achieve an additional $7 billion in structural cost savings, totaling $18 billion compared to 2019.
In addition to oil and gas, ExxonMobil is investing heavily in sustainable technologies, such as carbon capture and storage, and hydrogen. The company envisions that carbon capture can help deliver lower emissions power for data centers with projects that are separate from the grid.
By 2030, ExxonMobil anticipates growing annual cash flows by $30 billion relative to 2024, or by $50 billion since 2019, and earnings by $20 billion versus 2024, or $35 billion since 2019. These projections are based on $65 per barrel Brent crude oil prices and $3 per MMBtu Henry Hub natural gas prices. For perspective, Brent crude oil prices averaged $81.13 per barrel from January through November 2024, and Henry Hub gas prices averaged $2.12 per MMBtu during that period. With the exception of 2020, 2024 saw the cheapest gas prices since 1998.
Between 2025 and 2030, ExxonMobil predicts generating a $165 billion surplus in cash beyond its existing dividend, leaving room for substantial dividend increases and buybacks. This cash surplus effectively represents ExxonMobil's margin of error compared to its target oil and gas prices. Should prices experience a downturn, ExxonMobil would still be able to raise its dividend while purchasing less stock.
ExxonMobil shares that at $55 per barrel Brent, it would expect to secure a $110 billion cash surplus. In contrast, if Brent prices averaged $85 throughout the forecast period, the surplus would amount to around $280 billion. ExxonMobil expects it could still fund its capital projects and its dividend even if Brent prices slipped to $35 through 2027 and $30 per barrel by 2030 - demonstrating how much ExxonMobil has improved performance in managing its production portfolio.
The dividend plays a critical role in ExxonMobil's investment rationale. Despite fluctuations in the oil and gas industry, ExxonMobil has increased its dividend for 42 consecutive years. Regardless of oil prices, investors have relied on ExxonMobil for a steady flow of passive income. ExxonMobil currently offers a 3.7% yield, which is substantial compared to the S&P 500's 1.2% yield.
Breaking away from debt reliance
ExxonMobil's corporate plan sets clear expectations for investors, holding the company accountable over the next five years. Most crucially, the plan is centered around generating positive cash flow and does not rely on debt. ExxonMobil currently boasts a balance sheet in the best shape it has been in a decade.
As shown in the chart, ExxonMobil holds minimal net debt on its balance sheet for a company of its scale. Its financial debt-to-equity and debt-to-capital ratios are extremely low, indicating that the company is not depending on debt to operate its business. ExxonMobil made use of its recent surpluses to help pay down debt.
Although it has boosted capital spending, ExxonMobil has emphasized investments that can drive high cash-flow generation. Projects that offer a low cost of production and higher returns, which ExxonMobil refers to as "advantaged assets," include the Permian Basin, Guyana, and its liquefied natural gas (LNG) portfolio. LNG is natural gas that is cooled and condensed into a liquid for export to international buyers.
ExxonMobil completed its acquisition of Pioneer Natural Resources earlier this year, which significantly boosted its Permian production. ExxonMobil now generates more than 50% of its production from advantaged assets, with a goal of achieving 60% by 2030 - helping to lower its production costs. By focusing on advantaged assets, ExxonMobil can generate positive cash flow even at lower oil prices, which should help maintain its financial health.
ExxonMobil is a powerhouse of passive income
If ExxonMobil can achieve its projected earnings growth, the company could be worth significantly more in the future than it is today. ExxonMobil is already an affordable stock - boasting a 13.3 price-to-earnings ratio. And that's based on earnings during a period of relatively modest oil prices.
Oil and gas companies usually command lower valuations compared to the broader market due to the industry's volatility and uncertain future of oil and gas in a low-carbon world. However, ExxonMobil's corporate strategy demonstrates that the company does not need oil and gas prices to surge to generate substantially higher earnings and cash flows over the medium term. It can then invest excess profits in new technologies to remain an energy titan even if global oil and gas consumption gradually decreases over time.
calculations show that in 2025, ExxonMobil might just be the most comprehensive oil and gas corporation to invest in, considering its all-encompassing nature.
ExxonMobil's strategic focus on sustainable technologies, such as carbon capture and storage, and hydrogen, demonstrates its commitment to diversifying beyond traditional oil and gas investments, which can contribute to attractive financial returns for investors interested in finance and investing in this sector.
With ExxonMobil aiming to generate a $165 billion surplus in cash beyond its existing dividend between 2025 and 2030, the company's substantial dividend increase and buyback potential make it an appealing option for income-seeking investors, even with potential fluctuations in oil prices.
