Exxon stock has thrived since a contentious proxy battle last month resulted in shareholders electing three new directors to the oil giant’s board. It has climbed 6% since the day of the vote, more than shares of competitors like Chevron (CVX). The board change may not result in an immediate strategic shift for Exxon—and there remain many open questions about its plan to battle climate change—but it’s becoming clear that investors were hungry for a change of direction.
One major shift that is likely to take place in the years ahead is that Exxon (XOM) will reduce its capital expenditure budget. The company had already cut the budget after Covid-19 caused demand to plunge, but its long-term spending plans still indicate that Exxon would be investing heavily in producing oil and gas. Under the newly constituted board, that budget is likely to come down more. Exxon has targeted $20 billion to $25 billion in capital expenditures from 2022 to 2025, which is “still higher than it needs to be for the core portfolio,” according to J.P. Morgan analyst Phil Gresh. He estimates that “sustaining capex”—or the amount of money it would take to sustain current production—is closer to $15 billion. Gresh says Exxon should put a $20 billion ceiling on capital expenditures, with about $2 billion of that spent on “energy transition” projects, up from a current rate closer to $600 million.
“With the potential for accelerated portfolio transformation, we think that Exxon can maintain its core asset base, keep its dividend coverage breakeven at less than $50/bbl Brent, pay down debt faster and become more of an industry leader on Energy Transition,” he wrote.
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Exxon could also sell considerably more assets where its production isn’t as efficient, and several refineries, the analyst writes. “This would have several benefits, including bringing cash in the door for the balance sheet, streamlining the asset base and providing a headline ESG (environmental, social and governance impact) reduction,” he wrote. Gresh has an Overweight rating on the stock and a $76 price target. Exxon was down 0.6% on Friday to $62.37.
As Barron’spointed out after the vote, the next few years could be profitable for Big Oil, even as investors push the companies to realign their missions to fight climate change. Publicly traded oil companies may have to cut their production to align with climate goals, but the demand side of the equation continues to rise. On Friday, the International Energy Agency projected that demand would exceed prepandemic levels by the second half of next year.
With lower supply and higher demand, prices could continue to increase. So even if Exxon doesn’t produce quite as much oil in the next few years, it will sell each barrel for higher prices, and be more likely to reward investors with large dividends.