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Will Exxon’s share price benefit from a low-carbon focus?

ExxonMobil’s share price is currently up year-to-date, as oil prices remain high. The Texas oil major is now reportedly looking to expand with a major oil acquisition, having become cash rich following a very successful 2021. However, would the money be better spent investing in its low-carbon business?

Exxon’s [XOM] share price has gained over 5% since the start of the year, closing 14 April at $116.05. Since 17 March, the Exxon share price has surged over 16%, thanks to the oil major posting record-breaking profits, as well as the fact that oil prices that are once again on the rise. Over the 12-month time frame, ExxonMobil’s share price is up 32%, with the war in Ukraine galvanising prices last year.

 

To maintain share price momentum, some analysts are wondering whether Exxon is right to pursue expanding its oil operations, or whether it should look to its carbon capture business, which could represent trillions in future earnings.

Exxon eyes Pioneer for major acquisition

Exxon has held preliminary talks to buy US shale producer Pioneer Natural Resources [PXD], according to a Wall Street Journal story published on April 7. Pioneer is a fracking giant operating in the oil-rich Permian Basin of West Texas and New Mexico.

 

The Journal reported that Exxon had been on the look-out for a major acquisition since posting record-breaking profits in 2022. Pioneer certainly fits that bill, with the fracking operation boasting a market cap of $53.8bn. But a deal won’t go through until later this year or next year, if it happens at all, according to sources.

Reuters’ Robert Cyran isn’t convinced that Pioneer is a suitable takeover target for ExxonMobil. Cyran reckons that it would cost ExxonMobil $64bn, and while the takeover could net the oil major a 11% rate of return, the bar needs to be higher for any tie-up.

Cyran notes that oil demand is near peak levels, and a combination of high prices and the popularity of electric vehicles means that ExxonMobil now trades significantly under its estimated earnings over the next year. In Cyran’s view, low-emission energy should be the priority for investment.

Exxon says low-carbon business could outperform oil

Executives at Exxon told investors that its low-carbon business could be worth more than fossil fuel production. In a presentation earlier this month, Exxon said that it expects to profit from carbon-cutting while simultaneously expanding fossil fuel output, reports the Financial Times.

Dan Ammann, Exxon’s president of low carbon solutions, told investors that the area he oversees could eventually generate hundreds of billions of dollars and outperform Exxon’s traditional fossil fuel-based business. However, for that to happen, the cost of carbon capture and hydrocarbon fuel would need to come down, along with government help in the form of incentives.

Exxon chairman and chief executive officer Darren W. Woods told the investors that the market for emission reductions could hit $14trn by 2050, with the sector representing a $6trn opportunity in that timeframe. Woods said that Exxon was “focused on the hard-to-decarbonise sectors, where cost-effective solutions are lacking, and where we can make a unique and significant contribution.”

Where next?

The oil major has come in for criticism over the pace of its energy transition, although this has done little to dampen enthusiasm for Exxon’s share price. The company has begun to move projects forward in this area and has announced carbon capture projects along the Gulf of Mexico, which it hopes will generate cash by the middle of the decade. Meanwhile, a new hydrogen facility in Baytown, Texas, will be the world’s largest low-carbon hydrogen producer when it starts up in 2027-28.

ExxonMobil’s foray into carbon capture and clean energy might be about profit, but for long-term survival it’s something it needs to take seriously. Governments around the world have set net-zero carbon targets and sales of new combustion engine vehicles will be banned in several major economies by the end of the decade.

In theory, renewable energy and carbon capture should provide more price stability than commodities. Last year the price of oil shot up as a result of the Russia-Ukraine conflict, while this year the OPEC+ decision to reduce production has once again increased oil prices

“This business is going to look quite a bit different than the base business of ExxonMobil,” Dan Ammann told Reuters. “It is going to have a much more stable, or less cyclical, profile.”

However, its new ‘advanced recycling’ plant in North America has raised environmental concerns. The facility is intended to be capable of breaking down 36,000 metric tons of plastics each year. Yet clean advocates warn it will generate hazardous pollutants.

Exxon’s share price carries a $130 12-month price target. Hitting this would see a 12% upside on Friday’s close.

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