Exxon Mobil Corp's (NYSE:XOM, ETR:XONA) investments in low-carbon markets provide long-term growth opportunities for the energy company, analysts at UBS believe.
“Exxon’s growing Low Carbon business is one of the five key drivers behind our view that Exxon is the best stock across our coverage to own for the next five years,” analysts wrote in a note to clients.
“While Exxon’s core Upstream and Downstream units remain the near/medium-term growth drivers, we see the Low Carbon unit as an increasingly important long-term growth engine.”
Analysts noted that low-carbon markets have a potential total addressable market (TAM) of about $14 trillion by 2050, which includes $8 trillion for electrons (wind and solar power) and $6 trillion for molecules (carbon and hydrogen molecules).
They highlighted Exxon’s differential approach of just focusing on molecules (mainly hydrocarbons) rather than investing across both like its peers have done.
“Exxon’s view has been to leverage existing strengths, including drilling, refining, and project management that's complementary to its existing asset base and technologies,” they wrote.
“The main focus areas for Exxon currently include carbon capture and storage, biofuels, lithium, and hydrogen. Exxon sees approximately 43% of the total addressable market in these areas, with long-term revenue potential in the $100 of billions range.”
UBS analysts see Exxon allocating 13% of its annual capital expenditures to low-carbon investments versus its peers at 20%.
“Based on Exxon’s approximately 15% internal rate of return on its investments that are not targeted towards reducing its own emissions, we see approximately $1.5 billion in higher-multiple annual earnings by the end of the decade,” they wrote.
“Further upside will come from in-house reduction efforts that are supported by policy, like decarbonization projects at Exxon facilities.
The analysts awarded Exxon and a ‘buy’ rating and price target of $149, which represented upside of 22.3% from Exxon’s share price at the time of writing.