Exxon Mobil’s Strategy: Be a Lean, Mean Cash Machine

Thanks to rising energy prices, oil producers faced a financial crunch last quarter. Exxon’s cash flow from operations in the third quarter was $12.1 billion, the highest since the third quarter of 2014, when Brent crude oil was trading at close to $100 a barrel. Its peer Chevron on Friday reported cash flow from operations of $8.6 billion and record free cash flow.

What to do with that money is an important question for Exxon, as it is for other producers. The first piece of the spending bucket—cash returns to shareholders—will determine which investors stick with today, while the second piece, capital expenditures, will drive the trajectory of future returns.

The former seems easier to understand: Investors just want more of it. Shares of Canadian oil producer Suncor Energy jumped 13% on Thursday after it said it would double its dividend and increase share buybacks.

For its part, Exxon raised its quarterly dividend on Wednesday while maintaining its status as a dividend elite. On Friday, it announced the resumption of share buybacks from next year; The company expects to repurchase up to $10 billion in a year or two. That’s still modest compared to historical levels: In its heyday, Exxon used to return about $30 billion a year through buybacks.

Exxon’s return to repurchase next year could help narrow its valuation gap relative to Chevron, which raised its dividend early and beat Exxon on its buyback announcement. On average, Chevron is commanding a price-to-forward-earnings multiplier that is 12.3% higher than Exxon over the past six months. In the third quarter, Exxon returned 45% of its free cash flow to shareholders, while Chevron returned 48% through dividends and repurchases.

The immediate cash return is attractive, but long-term investors will want to pay attention to Exxon’s future spending plans, which the company plans to unveil in December after a meeting with its reconstituted board (those active investors named in May at Engine No. including 1). Returning more cash to shareholders today means less available to spend tomorrow. On Friday’s earnings call, Exxon stuck to its disciplined $20 billion to $25 billion annual capital spending guidance and raised its investment target for low-carbon projects, from 10% to 12.5 of its annual budget on such projects. % effectively committed, including some moonshot technologies. such as hydrogen and carbon capture. This is a huge step up from the previous 2.4% to 3% range. It also means that Exxon is prepared to redirect substantial amounts from oil and gas production, which is a lackluster business. The company has already lagged behind some of its peers in long-term investments in recent years.

More cash today is certainly music to investors’ ears, especially when oil companies are trading at huge discounts. Those in it for the long haul will want to listen more closely.