Exxon Mobil Corporation XOM mentioned in its recent earnings call that it plans to lower its breakeven costs to $35 per barrel by 2027 and $30 per barrel by 2030. Now, the billion-dollar question lies with the investors: To what extent will this lower breakeven, if achieved, aid XOM?
This is a realistic question that should arise in every investor’s mind since the integrated energy giant derives the lion’s share of its earnings from its upstream business. The no-brainer answer is that this level of low breakeven costs will be highly beneficial for XOM’s bottom line, especially from its upstream business. In other words, ExxonMobil will remain profitable even if crude oil prices drop significantly and stand to earn substantially more when prices climb.
To add to that, even during most months of 2020, when energy demand collapsed due to the COVID-19 pandemic, ExxonMobil’s upstream operations could have been profitable if its breakeven costs had been $30 per barrel. Per data from the U.S. Energy Information Administration, the Cushing, OK, WTI Spot prices for March, April and May were only below the $30 per barrel mark. Thus, there is no doubt that this development, if achieved, is going to be a game changer for ExxonMobil.
According to Statista, a leading platform for data collection and visualization, the breakeven price in the Permian, especially in the Delaware and Midland sub-basins, is well below $40 per barrel. Hence, companies operating in the Permian, like Chevron Corporation CVX and EOG Resources Inc. EOG, are experiencing low breakeven prices.
In 2024, CVX conducted 80% of its development activities in the Delaware basin. Chevron plans to increase the development program in the Delaware basin to 85% this year. This simplifies CVX’s strong focus on low breakeven-cost operations to maximize its profit.
In its recent earnings call, EOG said that it could easily handle all its planned spending for this year, even if oil prices trade in the low $50 per barrel. That means that to remain financially healthy, EOG does not need high oil prices.
Shares of ExxonMobil have declined 4.4% over the past year, outpacing the 6.3% fall of the composite stocks belonging to the industry.
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From a valuation standpoint, XOM trades at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 6.45x. This is above the broader industry average of 4.05X.
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