Value Investing

Vladimir Dimitrov, CFA

Equity Bottom-Up

<ul>
<li>ExxonMobil's stellar performance over the past year and a half has come as a surprise to many, given all the negative sentiment at the time.</li>
<li>Even as the company is about to dial-up its capital and exploration expenditures, forward free cash flow yield still remains attractive.</li>
<li>The dividend appears safe for now, however, investors should not rule out an adverse scenario going forward.</li>
</ul>


ExxonMobil's stellar performance over the past year and a half has come as a surprise to many, given all the negative sentiment at the time.
Even as the company is about to dial-up its capital and exploration expenditures, forward free cash flow yield still remains attractive.
The dividend appears safe for now, however, investors should not rule out an adverse scenario going forward.


ExxonMobil: Patience Pays Off, Excitement Doesn't

Managing Partner, VRS (Valuation & Research Specialists)

VRS (Valuation & Research Specialists)

Managing Partner

Valuation & Research Specialists (VRS) is a boutique financial advisor with more than 17 years of experience in Corporate Valuation and Finance, and a diversified client base including some of the largest Companies in Greece.

Since 2002, VRS has completed more than 200 engagements in the areas of business valuation and financial analysis for more than 100 clients in a wide range of industries.

VRS has been honored to work with small and large private and publicly traded companies in Europe and overseas.

Boutique Financial Advisor

<h3>Corporate &amp; Investment Highlights</h3>
<ul>
<li>ExxonMobil’s revenues for 2020 decreased to $ 181,502mn recording a major percentage drop of 31.49% compared to revenues of 2019. All profitability indicators showed a similar downward trend in 2020 (EBITDA, EBIT, EBT, EATAM). Partial or total lifting of restrictive measures across the global economy in 2021 contributed to the company’s fast recovery, setting it back on track to achieve higher profitability. The estimates for the revenues for 2021 range around $ 275,883mn while the announced nine-month revenues were $200,675mn.</li>
<li>Company’s revenues come mainly from Upstream, Downstream, and Chemical activities, accounting for an amount of 8%, 79% and 13% respectively of 2020 total revenues. In 2021 Downstream business unit recorded an increase of $ 504mn of revenue in the first nine months compared to revenues of the previous year due to higher margins on stronger industry refining conditions and reduced expenses. Upstream business unit surged the most among others company’s business units showing a significant growth compared to 2020 ($9,690mn in Q3 of 2021 compared to -$1,498mn in Q3 of 2020).</li>
<li>Net losses for 2020 amounted to -$22,440mn compared to the profitable (Net profit $14,340mn) 2019. For 2021 we expect earnings to increase to $21,740mn partly due to in line implementation of ExxonMobil’s business plan along with the lifting of Covid-19 restrictions, taking also into account that for the first nine months of 2021 earnings stood at $14,170mn. For 2022 we expect EATAM to range broadly around $23,707mn.</li>
<li>Expenditures (Capex) amounted to $16,329mn in 2020, compared to $23,980mn in 2019. Our estimates, based on the company’s management, is that Capex for 2021 will range around $19,000-21,000mn and for the year 2022 will range around $20,000-25,000mn due to short term capital spending on assets with the highest potential future value, including developments in Guyana and the U.S. Permian Basin, targeted exploration in Brazil and Chemicals projects aiming at high-value performance products.</li>
<li>ExxonMobil’ EBITDA for 2020 decreased to $18,284mn from $39,884mn of 2019. EBITDA stood at $35,177mn until Q3 of 2021 compared to $14,593mn during the corresponding period of 2020, benefiting from the significantly improved performance of the Upstream business unit, as well as from the consistently strong performance of the Downstream business unit. We expect EBITDA to range around $49,659mn boosted mainly from the Downstream business unit of the company.</li>
<li>Debt amounted to $47,182mn as of December 31st, 2020, compared to $26,342mn in 2019. More specifically, for 2020, long-term debt consisted of $41,026mn due in US dollars and $6,156mn representing the U.S. dollar equivalent at year-end exchange rates of amounts payable in foreign currencies. Based on the company’s reports, we assume that the debt will range around 43bn and 37bn for 2021 and 2022 respectively, achieving the company’s ambitions to improve the total debt to capital ratio around 20%.</li>
<li>ExxonMobil plans to grow investments that lower emissions, leveraging the company’s technology, scale, integration, and global footprint. Cumulative low-carbon investments are anticipated to be approximately $15 billion from 2022 through 2027. The company is also on track to achieve its 2025 emissions intensity reduction plans by the end of 2021 and expects to announce accelerated Scope 1 and Scope 2 reduction plans in the following months.</li>
</ul>

Corporate &amp; Investment Highlights

ExxonMobil’s revenues for 2020 decreased to $ 181,502mn recording a major percentage drop of 31.49% compared to revenues of 2019. All profitability indicators showed a similar downward trend in 2020 (EBITDA, EBIT, EBT, EATAM). Partial or total lifting of restrictive measures across the global economy in 2021 contributed to the company’s fast recovery, setting it back on track to achieve higher profitability. The estimates for the revenues for 2021 range around $ 275,883mn while the announced nine-month revenues were $200,675mn.
Company’s revenues come mainly from Upstream, Downstream, and Chemical activities, accounting for an amount of 8%, 79% and 13% respectively of 2020 total revenues. In 2021 Downstream business unit recorded an increase of $ 504mn of revenue in the first nine months compared to revenues of the previous year due to higher margins on stronger industry refining conditions and reduced expenses. Upstream business unit surged the most among others company’s business units showing a significant growth compared to 2020 ($9,690mn in Q3 of 2021 compared to -$1,498mn in Q3 of 2020).
Net losses for 2020 amounted to -$22,440mn compared to the profitable (Net profit $14,340mn) 2019. For 2021 we expect earnings to increase to $21,740mn partly due to in line implementation of ExxonMobil’s business plan along with the lifting of Covid-19 restrictions, taking also into account that for the first nine months of 2021 earnings stood at $14,170mn. For 2022 we expect EATAM to range broadly around $23,707mn.
Expenditures (Capex) amounted to $16,329mn in 2020, compared to $23,980mn in 2019. Our estimates, based on the company’s management, is that Capex for 2021 will range around $19,000-21,000mn and for the year 2022 will range around $20,000-25,000mn due to short term capital spending on assets with the highest potential future value, including developments in Guyana and the U.S. Permian Basin, targeted exploration in Brazil and Chemicals projects aiming at high-value performance products.
ExxonMobil’ EBITDA for 2020 decreased to $18,284mn from $39,884mn of 2019. EBITDA stood at $35,177mn until Q3 of 2021 compared to $14,593mn during the corresponding period of 2020, benefiting from the significantly improved performance of the Upstream business unit, as well as from the consistently strong performance of the Downstream business unit. We expect EBITDA to range around $49,659mn boosted mainly from the Downstream business unit of the company.
Debt amounted to $47,182mn as of December 31st, 2020, compared to $26,342mn in 2019. More specifically, for 2020, long-term debt consisted of $41,026mn due in US dollars and $6,156mn representing the U.S. dollar equivalent at year-end exchange rates of amounts payable in foreign currencies. Based on the company’s reports, we assume that the debt will range around 43bn and 37bn for 2021 and 2022 respectively, achieving the company’s ambitions to improve the total debt to capital ratio around 20%.
ExxonMobil plans to grow investments that lower emissions, leveraging the company’s technology, scale, integration, and global footprint. Cumulative low-carbon investments are anticipated to be approximately $15 billion from 2022 through 2027. The company is also on track to achieve its 2025 emissions intensity reduction plans by the end of 2021 and expects to announce accelerated Scope 1 and Scope 2 reduction plans in the following months.


<ul>
<li>Exxon Mobil has been one of the best-performing energy stocks since I first covered it in September of last year.</li>
<li>For well-diversified portfolios, holding Chevron in addition to Exxon Mobil is sensible.</li>
<li>In the case of a concentrated portfolio, however, Chevron appears as a better choice at this point.</li>
</ul>


Exxon Mobil has been one of the best-performing energy stocks since I first covered it in September of last year.
For well-diversified portfolios, holding Chevron in addition to Exxon Mobil is sensible.
In the case of a concentrated portfolio, however, Chevron appears as a better choice at this point.


Alpha-Centric ESG Research

Kyle Rudden

<ul>
<li>One of the significant outcomes of COP26 was an agreement on the mechanism and rules for implementing an international carbon market and emissions trading scheme.</li>
<li>Global carbon markets could help expedite emissions reductions and provide countries greater flexibility in how they meet national-level climate targets under the Paris Agreement.</li>
<li>Global carbon markets are expected to create new investment opportunities including Carbon Capture and Storage (CCS) which plays a key role in carbon markets. Herein, CCS stocks.</li>
</ul>


One of the significant outcomes of COP26 was an agreement on the mechanism and rules for implementing an international carbon market and emissions trading scheme.
Global carbon markets could help expedite emissions reductions and provide countries greater flexibility in how they meet national-level climate targets under the Paris Agreement.
Global carbon markets are expected to create new investment opportunities including Carbon Capture and Storage (CCS) which plays a key role in carbon markets. Herein, CCS stocks.


COP26: Global Carbon Markets Could Mean Investment Opportunities in Carbon Capture and Storage

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

After submitting a confidential, non-binding, indicative all-scrip merger proposal to <a href="https://www.smartkarma.com/entities/oil-search-ltd" target="_blank" data-smartkarma-citation="entities:773:1" rel="noopener">Oil Search Ltd (OSH AU)</a>'s board on the 25 June, <a href="https://www.smartkarma.com/entities/santos-ltd" target="_blank" data-smartkarma-citation="entities:711:1" rel="noopener">Santos Ltd (STO AU)</a> <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02402372-2A1313090?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">bumped</a> the scrip consideration on the 2 August by 6.5% to 0.6275 new Santos shares for every OSH share.  This would give OSH's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price.  The OSH board recommended the Offer in the absence of superior proposal, and due diligence was afforded.
This morning, Santos and OSH <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02420086-2A1322734?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">entered into</a> a definitive agreement to merge the two companies in an all-scrip transaction. The scrip ratio remains unchanged. 
The OSH board has unanimously recommended shareholders vote in favour of the merger in the absence of a superior proposal.
The merger would create a major regional player with a pro-forma market cap of ~A$21bn. Santos expects the merger to unlock pre-tax synergies of US$90-115mn per annum.
The merger is subject to OSH shareholder approval, regulatory approvals, and Papua New Guinea (PNG) court approval.
It's that last approval that could prove to be a sticking point.  
Santos has a 13.5% interest in PNG LNG, behind <a href="https://www.smartkarma.com/entities/exxon-mobil-corp" target="_blank" data-smartkarma-citation="entities:811:1" rel="noopener">Exxon Mobil (XOM US)</a>'s 33.2% and OSH's 29%. OSH also holds a 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.
In a recently completed <a href="https://www.coiubsl.com/" target="_blank" rel="noopener">royal commission</a> involving complex UBS loans, the bank maintained the fees it charged the PNG government to borrow $1.2bn in 2014 to purchase a 10.1% stake in OSH were appropriate. The PNG government was compelled to <a href="https://www.reuters.com/article/papua-oil-search-idUSL4N1M23EF" target="_blank" rel="noopener">sell</a> that stake in 2017 when OSH's shares fell and it did not have the necessary funds to put up extra capital for the loan. Contrary to PNG's former PM comments that it made A$39mn on the deal, the commission heard PNG lost US$432mn. 
In <a href="https://skr.ma/epYxh" target="_blank" rel="noopener">Santos/Oil Search: Getting Facts Straight</a>, I wondered if this less-than-satisfactory situation might resurface in any government approval process for a Santos/OSH merger.
In various media articles, Deputy Prime Minister Samuel Basil said this week:
<blockquote>
If the merger will result in the weakening of any Papua New Guinean shareholders or shareholder interests, reduction in market liquidity, potential for job losses, potential delisting from PNGX, and loss of local ownership of the company assets to a foreign interest, it is not in PNG’s national interest.
</blockquote>
Such a statement raises the stakes after PNG's PM James Marapoe's earlier <a href="https://www.pmnec.gov.pg/index.php/secretariats/pm-media-statements/336-pm-marape-says-government-is-closely-monitoring-a-proposed-acquisition-of-oil-search-limited" target="_blank" rel="noopener">comments</a> back in August that:
<blockquote>
Oil Search Limited is a prominent PNG company whose activities comprise a significant percentage of PNG’s GDP and provides the livelihood to thousands of Papua New Guineans both directly and indirectly. Any proposed merger must satisfy the national interest test.
</blockquote>
OSH (incorporated in PNG) is listed in both Australia and PNG, however, Santos is only listed in Australia. OSH has around 5,000 PNG shareholders according to Basil.
Should the merger complete, and OSH is delisted - taking with it almost one-third of PNG's market cap - domestic shareholders will have no option but to acquire and trade their shares in Australia, an activity compounded by foreign exchange restrictions. Unless Santos plans to list the merged entity in PNG. 
Basil continues:
<blockquote>
The Board of Oil Search and Santos must explicitly inform Papua New Guinea their plans for PNG capital market development in the context of this merger. Our concern derives from the possibility that PNG will incur significant detriment in the oil and gas sector to a foreign company. It is equal to losing our sovereignty in the oil and gas industry where PNG will have no control over it.
</blockquote>
Put another way: should PNG investment funds re-domicile in Australia, PNG local investors will be cut off from investing (via Santos and OSH) in PNG's large PNG projects.
More below the fold.

After submitting a confidential, non-binding, indicative all-scrip merger proposal to Oil Search Ltd (OSH AU)'s board on the 25 June, Santos Ltd (STO AU) bumped the scrip consideration on the 2 August by 6.5% to 0.6275 new Santos shares for every OSH share.  This would give OSH's shareholders 38.5% of the merger group. The implied transaction price of A$4.52/share  - if using Santos price on the 24 June - is a 19.7% premium to the undisturbed price.  The OSH board recommended the Offer in the absence of superior proposal, and due diligence was afforded.
This morning, Santos and OSH entered into a definitive agreement to merge the two companies in an all-scrip transaction. The scrip ratio remains unchanged. 
The OSH board has unanimously recommended shareholders vote in favour of the merger in the absence of a superior proposal.
The merger would create a major regional player with a pro-forma market cap of ~A$21bn. Santos expects the merger to unlock pre-tax synergies of US$90-115mn per annum.
The merger is subject to OSH shareholder approval, regulatory approvals, and Papua New Guinea (PNG) court approval.
It's that last approval that could prove to be a sticking point.  
Santos has a 13.5% interest in PNG LNG, behind Exxon Mobil (XOM US)'s 33.2% and OSH's 29%. OSH also holds a 22.8% interest in Papua LNG, a brownfield LNG growth opportunity.
In a recently completed royal commission involving complex UBS loans, the bank maintained the fees it charged the PNG government to borrow $1.2bn in 2014 to purchase a 10.1% stake in OSH were appropriate. The PNG government was compelled to sell that stake in 2017 when OSH's shares fell and it did not have the necessary funds to put up extra capital for the loan. Contrary to PNG's former PM comments that it made A$39mn on the deal, the commission heard PNG lost US$432mn. 
In Santos/Oil Search: Getting Facts Straight, I wondered if this less-than-satisfactory situation might resurface in any government approval process for a Santos/OSH merger.
In various media articles, Deputy Prime Minister Samuel Basil said this week:

If the merger will result in the weakening of any Papua New Guinean shareholders or shareholder interests, reduction in market liquidity, potential for job losses, potential delisting from PNGX, and loss of local ownership of the company assets to a foreign interest, it is not in PNG’s national interest.

Such a statement raises the stakes after PNG's PM James Marapoe's earlier comments back in August that:

Oil Search Limited is a prominent PNG company whose activities comprise a significant percentage of PNG’s GDP and provides the livelihood to thousands of Papua New Guineans both directly and indirectly. Any proposed merger must satisfy the national interest test.

OSH (incorporated in PNG) is listed in both Australia and PNG, however, Santos is only listed in Australia. OSH has around 5,000 PNG shareholders according to Basil.
Should the merger complete, and OSH is delisted - taking with it almost one-third of PNG's market cap - domestic shareholders will have no option but to acquire and trade their shares in Australia, an activity compounded by foreign exchange restrictions. Unless Santos plans to list the merged entity in PNG. 
Basil continues:

The Board of Oil Search and Santos must explicitly inform Papua New Guinea their plans for PNG capital market development in the context of this merger. Our concern derives from the possibility that PNG will incur significant detriment in the oil and gas sector to a foreign company. It is equal to losing our sovereignty in the oil and gas industry where PNG will have no control over it.

Put another way: should PNG investment funds re-domicile in Australia, PNG local investors will be cut off from investing (via Santos and OSH) in PNG's large PNG projects.
More below the fold.

Oil Search/Santos: PNG a Potential Party Pooper

United States

Exxon Mobil Corporation operates petroleum and petrochemicals businesses on a worldwide basis.  The Company's operations include exploration and production of oil and gas, electric power generation, and coal and minerals operations. Exxon Mobil also manufactures and markets fuels, lubricants, and chemicals.

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Exxon Mobil (XOM US)

ExxonMobil: Patience Pays Off, Excitement Doesn't

ExxonMobil's stellar performance over the past year and a half has come as a surprise to many, given all the negative sentiment at the time. Even...

Vladimir Dimitrov, CFA

ExxonMobil: Equity Research Flash Note

Corporate & Investment Highlights ExxonMobil’s revenues for 2020 decreased to $ 181,502mn recording a major percentage drop of 31.49% compared...

VRS (Valuation & Research Specialists)

Exxon Mobil Vs. Chevron Or Both

Exxon Mobil has been one of the best-performing energy stocks since I first covered it in September of last year. For well-diversified portfolios,...

Vladimir Dimitrov, CFA

COP26: Global Carbon Markets Could Mean Investment Opportunities in Carbon Capture and Storage

COP26 set the stage for a new global carbon marketplace which could create trillions of dollars of new investment opportunities, including Carbon...

Kyle Rudden

Oil Search/Santos: PNG a Potential Party Pooper

Trading relatively tight at 2.5%/10%, assuming mid-Dec completion. Provided Santos/OSH can mollify the PNG government - just how challenging is it...

David Blennerhassett

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