Exxon Mobil Corporation (NYSE:XOM), one of the largest integrated oil companies in the world, delivered a stellar financial and market performance in 2022, aided by rising oil prices. The company’s prospects, however, are closely tied to its decarbonization business, which has come to the spotlight in recent months amid the increasing need to diversify its revenue sources due to regulatory threats. I am bullish on the prospects for Exxon Mobil as the company enters a transformation phase at a time when oil prices are tipped to remain strong.
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A Differentiated Strategy from Its Peers
Many of Exxon’s peers have already diversified into renewable energy production, such as wind and solar power, but Exxon has resorted to its core products centered around crude oil. Although this strategy has helped the company make the most of rising oil prices, ESG-focused investors have raised concerns over Exxon’s future as the company’s earnings power is likely to deteriorate without exposure to clean energy.
In response to this threat, Exxon has decided to double down on its carbon capture business as opposed to embracing renewable energy. In 2021, the company formally launched a Low Carbon Solutions business unit focused on carbon capture and storage, hydrogen, and lower-emission fuels.
According to CEO Darren Woods, this decarbonization business unit could outgrow the oil business in less than 10 years, aided by aggressive investments in this sector. Earlier this year, Exxon boosted its planned investment in this sector to $17 billion through 2027 from $15 billion.
Last October, Exxon signed its first commercial deal from this segment by partnering with CF Industries Holdings (NYSE:CF) and EnLink Midstream (NYSE:ENLC) to capture and store 2 million tons of carbon emissions annually produced by a fertilizer plant starting in 2025. Earlier this month, Linde (NYSE:LIN) signed a long-term contract with Exxon to capture carbon emissions from its planned clean hydrogen project in Texas.
With many companies forced to reduce carbon emissions to comply with net-zero emission goals announced by the U.S. government, Exxon seems well-positioned to leverage its carbon capture expertise to win new clients in the future.
The Addressable Market Opportunity is Massive
According to the International Energy Agency, there are 35 carbon capture and storage facilities today, with the capacity to capture 45 metric tons of carbon emissions annually. However, to reach the net-zero emission scenario by 2030, carbon capture facilities need to capture around 1,300 metric tons of carbon emissions annually. These numbers suggest the world is a long way behind where it needs to be to achieve these goals, and this creates a good opportunity for Exxon to earn attractive returns from its decarbonization investments.
The regulatory environment is turning favorable for the carbon capture business as well. The Inflation Reduction Act, signed into law last year, offers a tax credit based on the carbon emissions captured and sequestered. The Act paves the way for Exxon to earn tax credits ranging from $50-$85 per ton of carbon emissions captured by the company.
Exxon is aggressively building facilities to capture carbon emissions, and its Houston facility is expected to capture 100 million metric tons of carbon emissions annually. Once this facility is fully functional, Exxon will earn billions of dollars from tax credits alone, assuming the current policies will prevail in the future.
Driven by favorable policy decisions and the lack of existing facilities, Fortune Business Insights predicts the carbon capture and sequestration market to grow at a CAGR of 19.5% through 2028. Exxon Mobil, as one of the first-movers in this sector, is well-positioned to benefit from this stellar growth.
Is Exxon Mobil a Buy, According to Analysts?
Morgan Stanley (NYSE:MS) analysts recently included Exxon Mobil as one of their top 30 stock picks for 2025, citing the strong momentum for the decarbonization business and the favorable outlook for oil prices in the next few years. Many Wall Street analysts share this optimism for the oil giant. Based on 11 Buys, six Holds, and one Sell assigned in the past three months, the average XOM stock price target is $128.09, which implies upside potential of 10.6% from the current market price.
Conclusion: Exxon is a Good Bet on Oil Markets and Decarbonization
As one of the few oil companies highly concentrated on crude oil-related businesses, Exxon Mobil will benefit from the continued strength in global oil prices in the next few years. Its growing decarbonization business, on the other hand, adds much-needed stability to the business in the long run.
The carbon capture business is not as cyclical as the oil business as well, which bodes well for investors who are looking for stable revenue growth trends. Exxon’s business transformation is well and truly gathering pace, and the company looks poised to deliver attractive long-term returns to its shareholders.
