RBC Capital Markets assumes coverage of Exxon Mobil Corporation (NYSE:XOM) with a Sector Perform rating (previously Outperform). Exxon has had consistent best-in-class execution and returns through the cycle, and the firm expects this to continue going forward, largely driven by the downstream. That said, RBC Capital Markets believes this is reflected in its valuation relative to peers, while it also sees upside risk to capex over time through both organic and inorganic activity.
Exxon has a sustained track record and corporate reputation for quality of assets, reliability of performance and a tenacious focus on seeking competitive advantage and superior returns. The firm believes this is the key driver behind its premium multiple relative to peers, and what is likely to maintain its premium over the sector. Looking out to 2020, RBC Capital Markets expects Exxon to generate a 12.2% ROACE, versus the European average close to 11%.
Exxon generates the highest downstream returns across the peer group, driven in RBC Capital Markets' view by higher average refinery size and higher integration through the value chain. The firm expects continued investment in the downstream (it forecasts $2-3bn capex p.a.), in order to enhance the integration and invest in petrochemicals. On the firm's numbers, Exxon’s downstream division generates a significant portion of its free cash flow – and funds one of the key tenets of the investment case, share buybacks.
Similar to Chevron, Exxon has highlighted its shift towards more short-cycle investments, driven by the combination of an uncertain commodity and the relative attractiveness within its portfolio, in RBC Capital Markets' view. RBC Capital Markets forecasts ExxonMobil to spend $2-3bn on its US onshore assets over the next few years, steadily rising close to $5bn p.a. by 2025. The firm believes this investment could help grow its unconventional volumes close to 650kbd by 2025. RBC Capital Markets continues to be skeptical about the free cash flow generation of such assets over the longer term, however do not expect the returns drag to be material.
The firm thinks the US majors have much more sustainable dividend policies than European peers, with a lower, progressive dividend coupled with share repurchases to utilize excess free cash flow. Exxon currently offers a 3.8% dividend yield, however given the current environment, RBC Capital Markets expects repurchases to be fairly muted (it forecasts $1bn in 2017 and $3bn p.a. in 2018+). Instead, the firm believes the company could utilize this via more M&A activity, bolstering longer-term options. On the firm's numbers, Exxon trades on 9.4x 2018 EV/DACF, versus the Global average at 7.6x and Europeans at 5.8x. RBC Capital Markets' $95 price target implies upside in line with the sector, and it rates the stock Sector Perform.