Exxon Mobil’s $50B Stock Buyback Is Wrong (NYSE:XOM)

Exxon Mobil Company (NYSE:XOM) shares have seen renewed upward momentum in latest days after the looks of a extreme winter storm within the U.S. and Canada has elevated provide fears in power markets. Moreover, Exxon Mobil not too long ago introduced its capital plan for FY 2023, which included an aggressive improve in its share buybacks resulting from document free money circulate. Contemplating that a minimum of a few of Exxon Mobil’s share repurchases come a time of document profitability, cyclically excessive petroleum/pure gasoline costs and really excessive inventory costs, I imagine shareholders would get extra worth if Exxon Mobil raised its dividend as a substitute!

Winter storm is propping up costs (briefly)

Petroleum costs have soared larger currently, largely due to a major winter storm that has begun to trigger main injury within the U.S. and Canada. Extreme climate occasions are sometimes excellent news for producers that get to promote their product for the next worth available in the market. The worth for WTI crude soared again to $80 a barrel yesterday, after dropping towards $70 a barrel earlier this month.

The surge in petroleum and pure gasoline pricing in 2022, which has largely been associated to Russia’s invasion of Ukraine, has led to document earnings and free money circulate for Exxon Mobil.

Exxon Mobil’s free money circulate soared to $22.0B in Q3’22, exhibiting a rise of 144% over the year-earlier interval when the market didn’t worth in main sanctions on the Russian power sector in addition to the disruption of pure gasoline provides to Europe. For the fourth-quarter, Exxon Mobil is about to report sturdy free money circulate (“FCF”) as effectively (however seemingly not as sturdy because it was in Q3’22 resulting from decrease common realized costs). I imagine that the corporate may generate free money circulate of $16-18B in This autumn’22.

Clearly, Exxon Mobil’s free money circulate is cyclically inflated proper now, and I estimate that the agency will see a lot weaker FCF in FY 2023, particularly if a recession hits the worldwide economic system.

Click on to enlarge

(Supply: Writer)

New $50B inventory buyback represents vital up-size

Earlier this month, Exxon Mobil introduced a serious improve in its inventory buyback plan. In line with the agency’s capital plan, Exxon Mobil plans to spend $50B over a three-year interval on inventory buybacks with the intention to distribute abnormally excessive free money circulate from the surge in petroleum and pure gasoline costs to buyers. Exxon Mobil beforehand had a $30B inventory buyback in place that was anticipated to be accomplished subsequent 12 months. The $50B inventory buyback will final by means of FY 2024 and contains the $15B that Exxon Mobil is predicted to spend on buybacks in 2022.

Provided that the buybacks fall right into a interval of extra earnings and free money circulate, I imagine buyers would get a much better deal if Exxon Mobil raised its dividend payout as a substitute. The $35B of shares anticipated to be purchased again in FY 2023, and FY 2024 signify 8% of the agency’s present market cap.

Exxon Mobil’s valuation

I made a great revenue on Exxon Mobil in 2022, however on condition that the agency’s shares are buying and selling at document costs, I sold my shares and moved a few of my returned capital into midstream companies (like this one) which I imagine provide buyers higher valuations, dividend prospects and threat profiles. Exxon Mobil’s shares at present commerce at a P/E ratio of 9.7 X… which can look cheaper than it truly is. Earnings estimates indicate an enormous (20%) drop-off in earnings in FY 2023, indicating that the market believes that Exxon Mobil’s earnings (and free money circulate) have peaked. With earnings estimates lowering, Exxon Mobil may see a a lot larger P/E ratio in FY 2023.

Dangers with Exxon Mobil

Exxon Mobil’s free money circulate is liable to a serious cyclical adjustment in FY 2023, until power costs proceed to stay method above the long run common… which I think about unlikely as a result of economic risks are rising. The winter storm affecting the U.S. and Canada is doing its half in conserving petroleum costs excessive for now, however as soon as the winter ends, Exxon Mobil is probably going set to see decrease free money circulate and earnings.

Last ideas

I imagine the $50B inventory buyback plan that Exxon Mobil not too long ago introduced is incorrect as a result of Exxon Mobil’s shares are buying and selling at 10-year highs and petroleum costs stay effectively above the long term common. Which means a minimum of among the share repurchases are going to be executed at Exxon Mobil’s cyclically inflated costs, which, in fact, implies that share buybacks don’t have as a lot worth for shareholders as in the event that they had been executed on the backside of the cycle. I might have appreciated to see Exxon Mobil make a stronger dedication to its dividend to distribute its free money circulate somewhat than shopping for again shares at document costs!