Subject: BRK: Why Not XOM?
Fair warning. This is a really long post. I propose why BRK should consider buying XOM even at current prices. I use new data plus recap the steps taken and results achieved by XOM since 2017YE to buttress this. Data is from the updated XOM corporate plan released on Dec. 11, 2024. If this isn't of interest, save your time.

************

For the last two days I’ve spent hours both listening to and studying XOM’s updated plans. I truly hope that someone in the Warren, Ted, Todd, and Abel investment mix has been doing the same. Or, at least, has someone assigned to doing so.

Why? Because XOM is one of the seemingly very few companies where BRK could invest large sums of cash without really moving the market. And feel pretty confident that – on a risk adjusted basis – it would yield long term returns superior to just holding cash and waiting for a market crash. It may well be true that waiting is still the better strategy.

Buffett has made clear that his investments in OXY and CVX are basically bets on oil prices. I think he really understands the macro factors that impact oil prices – and their cyclic nature. And he also understands how that can impact the earnings of traditional O&G suppliers. But his investment style doesn't put much weight on future projections.

What I fear Warren et. al. may not understand is what XOM has done to be able to prosper through these price cycles. And how much it has changed over the past seven years as a corporation. The theme of XOM’s corporate plan presentation this year is “A League of Its Own.” It is now a very different corporation than other major O&G companies.

This year’s plan presentation goes into the reasons behind this claim. And presents an unprecedented level of detail about the specific projects that result in their financial outlook. An Exxon friend and I were somewhat shocked in early 2018 when XOM first took steps to better inform and influence Wall Street about its plans and goals. This was very different from XOM’s past. They used to basically POPO (Piss On and Pass Over) Wall Street with lower level presenters and limited details. Darren Woods decided to change that in 2018 with specific data and top level presenters. Now this has been taken to another level.

The earnings and cash flow growth outlooks are a huge bonus versus cash. They expect to grow earnings 9-10% a year and achieve a 17% ROCE by 2030. That’s an additional $20 billion in earnings and $30 billion in cash flow. And, at $55 Brent Crude over the cycle, they will deliver $110 billion total in cash flow beyond capex and dividends. (You’ve got to listen to get this number). At $65 Brent crude, it $165 billion.

They’re now buying back $20 billion a year of stock – and expect to sustain that unless oil prices crash below $55 Brent crude. Their breakeven oil price now is $35 Brent crude, and they see that going down to $30 by 2030. They have reduced net Debt/Equity to circa 5% and have strengthened the balance sheet to rebuild borrowing capacity if needed. They are prepared to continue their major projects - plus shareholder rewards - through the bottom of the cycle.

(Memo: During the Pandemic crisis, XOM went to extraordinary levels of cost cutting to not cut the dividend. Many layoffs, no bonuses, no contributions to savings plans, hit their limit on debt, etc. It was a close call, but demonstrated their commitment to preserving (and growing) the dividend. They’ve now done so for 40+ years)

At XOM’s stock price as I type ($112) it has a 13 P/E, a forward dividend yield of 3.54%, and a total yield with buybacks of 7.19%. Add growth potential to this, and one has a pretty good margin of safety over cash, even risk adjusted. And doesn’t BRK get tax breaks on dividends versus interest?

The plan presentation is available at https://investor.exxonmobil.co... under Events.

I’m not going to attempt to summarize the Corporate Plan. Rather, I’m going to try to discuss the changes in XOM as a corporation since early 2018. It all begins with Darren Woods as CEO.

Woods became CEO on Jan. 1, 2017. In the 2018 Plan presentation, he said he spent a lot of time during 2017 meeting with Wall Street people and shareholders. He became convinced that XOM was doing the right things but that they were poorly understood by Wall Street and the public. He decided to change that when the updated Corporate Plan was approved and presented in early 2018. And he led the presentation together with the rest of senior management. That demonstrated respect for the analysts.

They presented the plan in greater detail than the past as mentioned earlier. Then came the Q&A session and Woods took a lot of heat from the analysts. The major issue was about XOM continuing to spend capex on major new projects while other O&G companies were cutting capex and focusing on dividends and buybacks. After a good deal of back-and-forth with the analysts, Darren finally said: “Because these are better opportunities than the businesses we now have!!! Why should I spend money on XOM stock and not develop high return projects?”

Then the questions became “Why should we believe these outlooks? For years XOM has talked about increasing O&G production, and yet it’s gone down instead.” Woods stuck to his guns, saying doing these projects were better for the shareholders in the long run. Also that XOM would be the operator in circa 85% of projects. Previously, a lot of the projects were operated by other – and slowed down.

The major projects were Guyana, LNG, Brazil, and an integrated investment in the Permian Basin. The latter included not only production but also refinery expansion and a world-scale new polyethylene plant in Corpus Christi plus associated midstream investments to move the products to downstream and distribution. There were also specific smaller investments to install new process technology in Europe and Singapore.

Time has proven that these were correct decisions. Brazil drilling yielded results that were not competitive with the other projects and fell off the plans list. But the others all succeeded well above expectations. For example, Guyana was originally thought to have circa 3.5 billion oil equivalent barrels of new reserves. Now it is above 11 billion, and continues to grow. The Permian expanded project has happened. All targets were achieved. The refinery expansion at Beaumont was very successful, and the Corpus Christi facilities are coming on line. With the recent acquisition of Pioneer, XOM is now the largest producer in the Permian. It was the earlier success and technology advancements with the Delaware basin acreage bought from the Bass brothers that justified the Pioneer acquisition.

The 2018 plan laid out aggressive targets for reducing costs. These have been exceeded. By 2024YE, XOM will have reduced operating costs across the corporation by $11 billion on track to meet the original $15 billion by 2027. This has now been raised to $18 billion by 2030.

XOM has significantly outperformed other major international O&G companies for the past several years. It is now acknowledged that Woods made the right decisions. The major projects in the 2025 corporate plan are still the same as those outlined in early 2018.

It is this performance that forms the reason to believe the new 2025 plan projections.

Perhaps of longer term importance, Woods has completely reorganized XOM. When he took over, the company’s operations were “siloed” along traditional lines. There was an Upstream business, a Refining business, and a Chemicals business. Each had its own Technology organization and its own business support functions. There was also a separate Corporate Research function – all reporting to HQ. HQ was basically a holding company.

This is no longer true. All Technology organizations have been combined into one Technology function. All business support functions – accounting, purchasing, law, etc. – plus Project Management have been combined into single organizations. HQ has been closed, and senior management moved to the XOM complex just outside of Houston. There are now three operating functions – Upstream, Product Solutions (including Low Carbon Ventures) that report upwards to Woods and 3 senior VP’s – Upstream, Product Solutions, and basically Financial & Support.

ExxonMobil is now an operating company – top to bottom. The Product Solutions managers manage all aspects of their sector from the source to delivery to the customer.

The most immediate benefits of this reorganization has been the ability to reduce operating costs by combining functions. But perhaps the more important result has been greater synergies and flexibility. Combining the functions has permitted greatly enhanced learning by sharing best practices from each previous separate organization. And these now form standard practices and processes across all aspects of XOM. Also, there is now much greater flexibility to move resources to achieve the most important objectives. Almost all data is on a common basis. Soon all will be. This will greatly enhance the ability to use AI as one example.

Woods has also redefined what XOM is as a corporation. Now it is a technology company that converts hydrocarbon molecules (and other – e.g. lithium) into useful products that serve the needs of society in a reliable manner at an acceptable value to both customers and shareholders.

This different mindset is actually quite important. For example, Refining is no longer an operation to primarily separate and transform oil into fuels and feedstock. Now it Manufacturing, serving the needs of all product end uses. There are plans to convert units to other end uses as needed. “Refining” will not go away – it will just do more and different things.

There are exciting new product development outlined in the new Corporate Plan. Proxxima is a new epoxy material that is twice as strong as steel and 75% lighter. It has many potential applications from replacing steel rods in construction to auto bodies. It is made from molecules that formerly went into gasoline. Carbon Materials is a new graphite that can increase both the capacity and reduce the charging time of batteries by 30% each. Another new carbon product is a lightweight product that is used in Permian Basin frac operations that improves recoveries, especially in very long horizonal wells. All have large potential markets. But these are a subject for another day.

Read and listen to the plan. I hope BRK does. An XOM investment would not solve BRK’s challenge to reinvest cash. But it could help in a significant manner.