The firm's products drive transportation, power cities, lubricate industry, and provide petrochemical building blocks that are behind a wide variety of consumer and industrial products.
Exxon organizes its business into three integrated segments:
- Upstream (50% of earnings): explores for, develops, and produces oil and gas around the world. Crude oil and natural gas liquids account for about 60% of Exxon's production, with natural gas driving the remaining 40%.
- Downstream (28% of earnings): Exxon's global network of manufacturing plants, refineries, transportation systems, and distribution centers provides fuels, lubricants, and other products to customers.
- Chemicals (22% of earnings): manufactures and markets petrochemicals and a wide variety of specialty chemical products used in packaging materials, plastic bottles, vehicle parts, synthetic rubber, solvents, etc.
Exxon and its predecessors have paid uninterrupted dividends since 1882. The energy giant has delivered 37 consecutive years of annual dividend growth as well, making it one of the few dividend aristocrats in the energy sector.
Rockefeller quickly expanded his reach in the then-fledgling oil industry, snapping up rival refineries and amassing an impressive network of pipeline transportation. In fact, by the 1880s, his company and Exxon's predecessor, Standard Oil, controlled over 90% of America's refineries and pipelines, effectively giving him control over the price of oil.
Unlike many rivals, Rockefeller ran Standard Oil in an extremely disciplined manner that has stuck with Exxon through the years. He realized this was a commodity industry and placed an obsessive focus on reducing cost, improving manufacturing processes, and becoming more vertically integrated to enhance operating efficiencies.
Combined with strict financial discipline, Standard Oil could afford to acquire rivals during industry downturns, invest in technology to develop new commercial products from oil, and expand its business with internally generated cash flow rather than rely on outside investors.
Eventually, Standard Oil's scale and power became an issue in the public eye. Anti-monopoly proceeds were launched against the firm around the turn of the twentieth century, leading to a government-forced breakup of the business into more than 30 separate companies in 1911.
Standard Oil of New Jersey, the biggest piece of the breakup, would later become Exxon and was quickly crowned the largest oil company worldwide. This proved to be an enviable position as the world's thirst for oil was just getting started.
Global oil production rose from less than 2 million barrels per day (bpd) in 1920 to 100 million bpd in 2019, serving as a powerful tailwind for Exxon. Liquid fuels took the largest share of global energy supplies thanks to their widespread availability, affordability, ease of transportation, and ability to meet a variety of needs.
Exxon continued following Rockefeller's playbook during this period (including in 1999 with an $80 billion acquisition of Mobil, the second-largest oil producer at the time and another descendant of Standard Oil) and continues to do so today to ensure it remains a force for decades to come.
Exxon's vertical integration is still an especially key advantage. Exxon controls all aspects of the fossil fuel business (from exploration and production to transportation, refining, and retail gasoline sales), diversifying its cash flow and softening its sensitivity to commodity price fluctuations.
For example, low oil prices sap profits from upstream oil and gas production. However, these same low prices reduce the input costs in Exxon's refining and chemical divisions, helping the firm remain profitable during lean times.
The company’s diverse asset base also provides market optionality and operational flexibility while allowing Exxon to optimize profits throughout various commodity cycles better than most of its peers, typically earning it a higher return on the capital it invests.
Combined with Exxon's pristine balance sheet (AA+ credit rating from Standard & Poor's) and budgetary discipline, this allows management to focus on making long-term investments in areas like technology (Exxon spends over $1 billion annually on R&D) that lower costs, improve production yields, and drive discovery of new products.
Along with these advantages, Exxon's reputation and longstanding relationships with political figures and regulators has historically helped it win big deals to produce oil fields for foreign nations, a major part of its upstream business.
Governments trust that Exxon can get projects done faster than most state-owned oil giants given its technology and operational leadership, often while achieving better production yields by drilling in areas where others can't. This provides the host country with more money faster, making Exxon an attractive partner.
Going forward, while most energy producers are pulling back on spending in response to weak oil and gas prices, Exxon sees a need to invest to meet long-term energy demand and offset the natural depletion that occurs at wells.
The company expects to spend about $30 billion annually between 2020 and 2025 to boost its upstream production by 25%, increase its chemical output by 30%, and potentially double its cash flow by 2025 compared to 2018.
These plans shouldn't threaten the dividend, which management expects to consume about 60% of the firm's free cash flow between 2019 and 2025. Even if the price of oil falls to $40 per barrel, Exxon's cash flow is still expected to see a potential 50% bump.
Overall, Exxon is one of the best run and financially strongest integrated oil majors in the world. The firm's capital discipline, quality assets, integrated operations, diverse resource base, and scale will continue to keep Exxon a global force in energy.
For one thing, incremental growth is challenging. In Exxon's upstream operations, it must continuously find or acquire new oil and gas reserves to replace what it pumps out of the ground and sells each year.
This has proven to be a challenging task at Exxon's scale, dampening the firm's growth prospects. For example, following many years of expansion, the company's oil-equivalent production rate has stagnated at around 4 million barrels per day for two decades.
Exxon is investing to boost its production output to 5 million barrels per day by 2025 (a 25% increase), but these ambitious plans come with their own risks as the global energy landscape continues evolving.
Predicting the future of energy is not easy, as demonstrated by President Jimmy Carter's warning in 1977 that "the oil and natural gas we rely on for 75% of our energy are simply running out." (U.S. oil and gas production both hit record highs in 2019.)
Yet as Exxon plows money into capital-intensive, long-lived assets, management must make reasonably accurate assumptions about global energy supply and demand decades out into the future to justify the prospective returns of these investments.
Some investors worry that the world's growing push to reduce carbon emissions and embrace renewable energy will cause fossil fuel demand to peak within 20 years, sooner than many energy executives expect.
For now, Exxon deserves the benefit of the doubt. The world's energy mix seems likely to remain very diverse for the foreseeable future, and Exxon has the financial strength and scale necessary to not only withstand short-term commodity price volatility, but also maintain flexibility to fund its dividend and large investments as needed.
Many of Rockefeller's business traits also live on at Exxon. Management runs the business conservatively, the firm's safety record remains elite, the balance sheet provides excellent capacity to opportunistically invest during downturns, and Exxon's scale and integrated model keep costs low while maximizing the resources it has to invest in technological leadership.
The biggest knock on Exxon is the firm's perceived lack of urgency to meaningfully diversify away from fossil fuels and address climate change. However, management has historically found success adapting the business to various challenges over time, and Exxon has plenty of financial firepower to make major chess moves in the future.
Overall, for income investors who are comfortable with the energy sector's unpredictable volatility and long-term evolution, Exxon appears to remain one of the few companies worth considering in this space.