Exxon big investments in cutting emissions should pay off, UBS says

Exxon Mobil ‘s new businesses aimed at lowering carbon-dioxide emissions are a long-term growth engine that will deliver earnings by the end of the decade, according to UBS. Exxon’s core oil production and refining operations will remain growth drivers in the near to medium term, but the company’s investments in slashing emissions are increasingly important over the long term, UBS analyst Josh Silverstein told clients in a note Sunday. “XOM’s growing Low Carbon Business is one of the 5 key drivers behind our view that XOM is the best stock across our coverage to own for the next 5 years,” Silverstein wrote. UBS has a 12-month price target of $149 for Exxon, indicating about 22% upside from Friday’s close of $121.79 per share. Exxon has gained more than 20% so far this year. The oil major is investing some $20 billion in a suite of emissions-reducing businesses including carbon capture and storage, biofuels, lithium and hydrogen through 2027. It’s part of the oil industry’s attempts to scale up carbon capture and storage across the U.S. Lower emissions, higher earnings Exxon sees a total addressable market of $6 trillion by 2050 for its low-carbon businesses with long-term revenue potential in the hundreds of billions of dollars, according to UBS. The oil major expects a 15% return on investment, which should generate $1.5 billion or more in earnings by the end of the decade, according to the investment bank. While Exxon’s European peers have invested in solar and wind, the U.S. oil major has focused on lowering emissions by relying on its key strengths of drilling, refining and project management, UBS found. Exxon has invested more than $100 billion in a carbon capture and storage hub along the Gulf Coast with the goal of removing 100 million metric tons of emissions per year from several industrial customers by 2040, according to UBS. The oil major has signed 6.7 million metric tons of carbon dioxide offtake agreements. Exxon has plans to increase biofuel production to 200,000 barrels per day by 2030 with 12 projects under development, with expected average returns of more than 20%. The company is also developing, at a cost of $7 billion , the Baytown Hydrogen Project, which is designed to produce 1 billion cubic feet of hydrogen per day. Exxon is also aiming to become a leading lithium producer by 2030 with production capacity to support more than 1 million electric vehicles per year, according to UBS. Production is expected to start in 2027. These projects do face risks from potential cost overruns or operational missteps, according to UBS. And many of the investments depend on federal support, primarily through the Inflation Reduction Act , to make economic sense. While it is still unclear how a second Trump administration will approach tax support for these projects, the incentives for carbon capture and hydrogen have bipartisan support in Congress, according to UBS. Balanced growth Exxon’s $20 billion investment in low-carbon businesses represents about 13% of the company’s total capital expenditures through 2027. That’s a smaller percentage than European peers who are plowing 20% of their capital expenditures into energy transition projects over the same period, according to the bank. UBS, however, said this is a positive because Exxon’s investments reflect the opportunity in cutting carbon emissions while also balancing the business with more visible growth in the company’s traditional fossil fuel production and refining businesses. The investment bank sees Exxon growing upstream production by about 6.3% annually at its higher margin assets in the Permian Basin and Guyana, supplemented by higher liquid natural gas supply. The company’s downstream refining and retail sales business should grow earnings by $4 billion starting in 2027, according to UBS.