Exxon Mobil Corporation XOM has provided a glimpse into its aggressive capital spending plans.
Capital Budget & Growth Projects
The integrated energy giant reaffirmed its plan of spending capital annually in the range of $30 billion to $35 billion through 2025. Notably, the company intends to spend up to $33 billion in 2020, up from last year’s $31.2 billion. However, ExxonMobil added that this year’s capital budget is subject to progress in key projects. In comparison, Chevron Corporation CVX, another energy giant, is planning for a narrower range of $19 to $22 billion through 2024.
The aggressive capital budget reflects ExxonMobil’s strong focus on growth projects, which the company believes will help to persistently improve value for shareholders. The growth developments include the Stabroek Block, located off the coast of Guyana. In the block, the company estimates gross recoverable resource of more than 8 billion oil-equivalent barrels. Moreover, the firm projects daily Guyana oil production volumes of more than 750,000 gross barrels by 2025.
Exploiting resources in Permian, the most prolific basin in the United States, is another growth strategy of the energy major. The company continues to increase production from the shale play and expects daily oil equivalent production volumes to surpass 1 million barrels by 2024. ExxonMobil also has an aggressive plan for exploratory activities in Brazil from 2020 to 2021.
What Concerns the Market?
Many investors raised questions on the integrated energy firm’s strong focus on oil projects, as globally shareholders are urging energy companies to lower emissions that will help tackle climate change. Among the oil companies that are finding ways to lower emissions are BP plc BP and Royal Dutch Shell plc RDS.A.
Moreover, the wide-spread coronavirus fear and slowing global economy are disrupting the market and lowering global energy demand. Also, investors are constantly pressing companies to focus more on returns rather than solely on production, leading many explorers to lower capital budget. Thus, many investors believe ExxonMobil’s aggressive capital spending plan is not suitable for the prevailing business environment.
While ExxonMobil intends to invest heavily in the coming years, this might require the company to divest assets and rely more on debt funding. This could weaken ExxonMobil’s balance sheet and lower the company’s free cashflow that will be available for dividend payments.
But There Lies Optimism
ExxonMobil, on the contrary, believes that it has enough financial flexibility to support its massive capital spending plans and hence will be able to continue to return capital to shareholders. The firm highlighted that the costs of availability of debt capital are historically low.
Moreover, the company expects global crude demand to increase, since the standard of living of people is improving over time. This highlights the company’s strong focus on oil projects. The integrated company added that its $15-billion strategic divestment program will remain in place, helping it to upgrade portfolio.