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In January 2017, Rex Tillerson left to join the Trump administration as Secretary of State (and was permitted to sell more than $50 million in directly held Exxon stock tax free). His replacement, CEO Darren Woods — now nearly four years into the job — has presided over a 50% decline in stock price and the degradation of Exxon’s balance sheet as the company has had to borrow to pay dividends.
Investors have already been fleeing. Shares in Exxon Mobil, at $40, are down 42% this year — compared with a 9% gain for the S&P 500. Adding insult to injury, Exxon was booted last week from the Dow Jones Industrial Average, in favor of Amgen, Honeywell and Salesforce.
It’s unkind to kick someone when they’re already down. But that’s just the nature of the lack of respect ExxonMobil is getting these days. Goldman Sachs’ oil analysts this morning decided to pile on, reiterating their case that Exxon is a sell. Granted, given the sadsack performance of Exxon, the sell case is “less absolute and more relative,” they said.
Giant Exxon alone fills up the oil and gas slot in many portfolios. So in replacing it, it might be better to go with a basket approach. Goldman offers 10 names, a group which they expect in 2022 (with $60/bbl oil) to generate 500 basis points more than Exxon in average free cash flow yield and 300 basis points higher cash returns on cash invested — cash generation being all the rage right now in an industry financed by a decade of cheap debt.
The most intriguing name in the Exxon-replacement basket, from Goldman’s Nikhil Bhandari, is Reliance Industries, the legendary Indian conglomerate that has in recent months overtaken Exxon as the largest publicly traded energy company after Saudi Aramco. Run by billionaire Mukesh Ambani, the jewel in the Reliance crown is its high-complexity megarefinery at Jamnagar, well positioned just 500 miles east of the Strait of Hormuz to receive all manner of advantaged feedstocks from the Persian Gulf. Reliance also offers differtiated high-growth upside via its Jio telecom division.
Closer to home, Exxon’s deepwater discoveries offshore Guyana have been the most exciting part of its exploration program in recent years, but for more concentrated exposure, better to go with Hess Corp, says Goldman’s Brian Singer. He thinks Hess stock ($66) embeds $50 of Guyana value, compared with just $16 per share for the rest of the company.
Rex Tillerson’s last big deal as CEO of ExxonMobil was to acquire 275,000 acres in the sweet spot of the Permian basin from the Bass brothers of Fort Worth for $6 billion. It’s enough land to drill out there for decades. For pure-play exposure, however, Goldman prefers Pioneer Natural Resources, long a leader in the region, and with a considerably lower cost of entry and cleaner balance sheet. Pioneer should generate a free cash flow yield of 11% versus 6% for Exxon.
Goldman’s Neil Mehta also prefers the return outlook for ConocoPhillips, despite its poor 2Q earnings and exposure to Alaska (President Biden would perhaps halt federal leasing there).
In Alberta, Canada, Exxon and its subsidiaries have invested more than $20 billion in the Kearl oil sands project, which puts out about 200,000 bbl per day of diluted bitumen oil. Oil sands have fallen out of favor, given its higher carbon footprint versus other oil extraction techniques and a plentitude of oil left to frack out of shale formations (at lower cost). If you want oil sands in your portfolio, Goldman’s Mehta recommends Canadian Natural Resources, which boasts a robust inventory of slow declining oil sands to mine. Might be a bit out of the money at today’s oil prices, but Goldman thinks CNQ will generate copious amounts of cash at $60 oil.
As for refinery row, Goldman is convinced that margins for chemicals and refined petroleum products will recover as the economy roars back in 2021 with the tailwinds of loose money and a Covid vaccine. They like Phillips 66 for its likelihood of generating returns on capital 600 basis points higher than Exxon’s as oil edges back to $60/bbl in 2022. They also prefer Marathon Petroleum, which will be “uniquely positioned” to return capital to shareholders if its $21 billion sale of Speedway gas stations goes through.
Among the global oil supermajors, Goldman’s analysts prefer Chevron, Total and BP. Chevron has a stronger balance sheet, and despite years of relative outperformance still looks cheaper than Exxon relative to future cash generation. Total is lauded for its big backlog of traditional oil and gas projects in Nigeria and Angola. Goldman analyst Michele della Vigna sees Total having faster production growth, plus a headstart on transforming into a net-zero carbon emissions company by 2015. As for BP — it has gone to great lengths over the past decade since the Deepwater Horizon disaster to reposition its portfolio, and isn’t stopping now, with big plans announced to really go beyond petroleum this time, by boosting carbon-reducing investments to $5 billion a year.
And now Woods, despite spending billions on best intentions, finds himself behind the ESG 8-ball. It used to be that a money manager would never face career risk for owning Exxon. But times change, and with Exxon so far indisposed to identifying a more comprehensive plan around carbon emissions reductions, incremental investor dollars are increasingly likely to support BP, Total, or the rest of this basket of replacements.
