Exxon Mobil's Strategy Paid Off: Bullish Analyst Touts Biofuels In New Forecast

Morgan Stanley analyst Devin McDermott reiterated an Overweight rating on the shares of Exxon Mobil Corp XOM and raised the price target from $124 to $131.

Through the first half of 2023, about 60% of the earnings improvement has already been delivered (~$5.4 billion annualized), putting XOM slightly ahead of plan, said the analyst.

The analyst's 2027 estimates are now roughly in line with the company's stated goals (versus modestly below on refining & chems prior), driving an increase in the price target.

Management expects about $5 billion annual increase in earnings power by 2027 (versus 2019), with $3.6 billion realized to date. About 1/3 of the increase is driven by strategic projects. 

In addition to already disclosed opportunities, the company also highlighted further potential refinery reconfigurations and renewable fuels growth, including 12 biofuels opportunities under development that offer above 20% returns, opined the analyst.

After opportunistically rationalizing & divesting lower-margin refineries over the past several years, XOM's portfolio is now 85% integrated with its chemical facilities, added the analyst.

According to the analyst, one of the more under-appreciated parts of XOM's portfolio, the company's chemicals business benefits from scale, strong integration with refining (~90%), as well as access to the company's Global Projects organization and proprietary technology.

As capacity expands, XOM is also increasing its sales of performance products, which deliver stronger margins and are seeing demand growth at 2x the rate of commodity chemicals, added the analyst.

According to the analyst, much of the uplift in the Specialty Products business will come from structural cost savings and other performance and operational improvements.

The analyst retains the preference for XOM within the U.S. Majors due to a greater rate of change in free cash flow and returns as attractive growth projects come online across upstream, downstream, & chemicals. 

Price Action: XOM shares are trading higher by 1.22% at $116.34 on the last check Monday.