Earnings from existing oil and gas reserves can be used to fuel investment in new, clean energy solutions.
Recent news that oil major ExxonMobil (XOM -0.39%) purchased drilling rights in the potentially lithium-rich Smackover formulation in Arkansas is more symbolic than game changing right now. Still, symbols matter, and the move highlights an investment case for exploration- and production-focused companies like ExxonMobil and Chevron (CVX 0.16%) that goes beyond their role as fossil fuel providers.
Here’s why investors should closely examine what’s going on in the sector.
ExxonMobil’s move
The company’s investment in lithium assets, although tiny in terms ExxonMobil’s existing assets, matters because of lithium’s use in electric vehicle (EV) batteries. Investing in the metal is often championed by speculators focused on the clean-energy transition theme. It’s an argument that has led investors to pay high multiples for clean energy stocks and relatively low multiples to traditional energy companies.
DATA BY YCHARTS
The low multiples haven’t gone unnoticed by investors like Warren Buffett, and stocks like Chevron and Occidental Petroleum make up major holdings in Berkshire Hathaway‘s portfolio. Still, many in the investment community remain concerned by the existential threat posed to fossil fuel companies by the rise of renewable energy.
Why ExxonMobil and Chevron will remain highly relevant
The clean energy argument is compelling. After all, renewable energy sources are essentially free, and their growth is supported by an increasingly favorable political and regulatory environment. As such, companies with the industry know-how and capital to invest in clean energy solutions can be seen as attractive.
But here’s the thing. There’s no reason why companies like ExxonMobil and Chevron can’t be those companies.
- They already possess the industry knowledge and existing relationships to transition to clean energy sources, and both companies are actively investing in low-carbon solutions.
- The new energy transition will not happen overnight, and the capital to invest in it can come from cash flows generated by oil majors’ fossil fuel assets, and
- Fossil fuels will still be a massive part of the global economy — irreplaceable in many applications — and the pacing of the transition is still subject to debate.
As such, instead of thinking of oil majors as dinosaurs, investors might think of them as being well-funded players ready and willing to finesse a transition to new/clean energy.
Both have substantive reserves from which to generate cash flows. ExxonMobil has 17.7 billion barrels (bbls) in oil reserves, while Chevron has 11.2 billion. For an understanding of what those figures mean, consider that Chevron’s production was 1.1 billion bbls in 2022 while ExxonMobil’s was 3.7 billion. As such, they both have multi-years’ worth of production in reserves, and the potential to replace reserves through investment.
However, it should be noted that Chevron is doing a better job of replacing reserves than ExxonMobil at present. Chevron’s reserves only dropped 0.1 billion bbls from 2021 to 2022 compared to ExxonMobil’s decline of 0.8 billion over the same period. The bottom line is that both companies have ample fossil fuel reserves to generate cash to invest in new/clean energy, and they are both already doing so.
IMAGE SOURCE: GETTY IMAGES.
Investing in the new economy
ExxonMobil is making $17 billion in “lower-emission investments” between 2022 and 2027, with 60% devoted to reducing its own emissions and 40% earmarked to reducing others’ emissions. These include investments in low-carbon hydrogen, carbon capture and storage, and renewable fuels facilities.
Chevron is also heavily committed to lower-carbon technologies, and plans to double its renewable fuels capacity from 2022 to 2030, while expanding renewable natural gas (RNG) production and investing in its hydrogen and carbon capture, utilization, and storage businesses.
Anyone doubting the pace of investment in these technologies only needs to look at oil services and equipment company Baker Hughes‘ first-quarter earnings, where new energy orders totaled $300 million in the first quarter, compared to $400 million over the whole of 2022.
Stocks to buy?
With the current price of oil around $67 a barrel and ExxonMobil and Chevron carrying dividend yields of 3.5% and 4%, respectively, the two stocks offer good value. Plus, there’s plenty of opportunity for both companies to invest in new/clean energy technology over the coming decades while continuing to maintain excellent cash flows from fossil fuels. As such, both stocks are attractive today for income-seeking investors.
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