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ExxonMobil's second-quarter 2026 adjusted earnings fell slightly short of expectations. Earnings and cash flow significantly improved as timing effects from mark-to-market derivative requirements unwound during the quarter. Shareholders' return guidance was unchanged.

Why it matters: In the current environment, earnings are likely to be messy as uncertainty translates into commodity price volatility, lost volumes, and results that may differ from benchmarks. However, Exxon's underlying progress on portfolio improvement continues while it's well-positioned to capitalize on the current environment, particularly historically high refining margins. The company continues to high-grade its portfolio, reaching $16.3 billion in cumulative structural cost savings since 2019 and on track for its $20 billion 2030 target. Total upstream production was 4.5 million oil-equivalent barrels per day, flat with a year ago, despite record Permian production of more than 1.8 mboe/d, due to lost Middle East volumes.

The bottom line: Our $156 fair value estimate and narrow-moat Rating are unchanged. Given Exxon's larger Qatar position, it has a relatively high exposure to the Strait of Hormuz closure. The impact from the closure is about 750 mboe/d relative to 2025 levels or about 15% of global production. However, as the quarter shows, the price impact is largely offsetting the volume impact. Importantly, Exxon is perhaps best positioned among peers to benefit from the currently strong refining margins given its relatively large downstream footprint. Also, in the event of the strait opening, refining margins are likely to prove stickier than oil and natural gas prices given the high number of global refining outages and now low inventory levels that need to be rebuilt.

Shares are trading at our fair value. Commodity prices will likely fall in the wake of a deal that fully opens the strait, weighing on shares. However, we'd view this as a buying opportunity given prices are unlikely to revert to prewar levels soon and Exxon will continue to increase its earnings capacity in the years to come.

We are increasing our fair value estimate to $162 per share from $156 to reflect higher oil and gas prices since our last update. Our forecast also includes the company's updated 2030 guidance for higher earnings and lower capital spending.

This implies a forward enterprise value/EBITDA multiple of 5.7 times our 2027 EBITDA forecast of $106 billion. We derive our fair value estimate using Morningstar’s standard three-stage discounted cash flow methodology. This methodology derives a terminal value using our assumptions for long-term earnings growth and return on new invested capital. This methodology also incorporates our moat rating, which reflects how long we expect a given firm to deliver excess returns on invested capital based on a discounted cash flow analysis.

In our DCF model, we assume Brent prices of $90 per barrel in 2026 and $88 per barrel in 2027. We assume a long-term oil price of $65 per barrel. We assume a weighted average cost of capital of 7.4%.

We assume Exxon’s production will grow over the next five years, approaching its target of 5.5 mmboe/d in 2030, but it could be lower due to divestments, which we do not explicitly model. Otherwise, we include margin expansion on higher prices and the addition of higher-margin volumes, mainly from the Permian and Guyana. We incorporate management's guidance for midcycle earnings growth by 2030 in the downstream and chemical segments as new projects and capacity come online over the next five years. However, we model well above midcycle levels in the next few years, given global refined product shortages.

Exxon earns a narrow Morningstar Economic Moat Rating based on its cost-advantaged assets. We continue to see Exxon’s integrated model as a source of competitive advantage. While its peers operate a similar business model with the same goal, they have largely failed to replicate Exxon’s success, as evidenced by their comparatively lower margins and returns. The integration of lower-cost assets, particularly in the downstream and chemical segments, act as an intact source of its cost-advantage moat.

Returns suffered from 2015 to 2020 from the secular decline in commodity prices and from its pursuit of production volume growth through acquisitions and investment in higher-cost assets like oil sands. The most notable and ill-timed acquisition was the 2010 purchase of XTO Energy, an unconventional natural gas firm, for $41 billion. Ultimately, Exxon wrote off most of the acquisition when it impaired its North American dry gas assets in the past several years.

The erosion of asset competitiveness during the last decade, demonstrated by impairments and debookings, helps explain the decline in upstream ROCEs from an average of 22% from 2010 to 2014 to an average of 6% from 2015 to 2019.

Moat ratings, however, are forward-looking, and although we expect overall returns to remain low, we see relatively high incremental returns on new invested capital.

Exxon has reduced and focused its capital budget on the highest-return areas, primarily Guyana and the Permian. Exxon estimates Guyana and Permian can deliver 10% returns at oil prices down to $35/bbl, which is supported by third-party researcher Rystad. Neither of these assets is yet fully reflected in reserve bookings. However, in this case, reserve disclosures are less useful for projecting future returns and evaluating moats than explaining the past. For perspective, Exxon has reported discoveries of 11 billion boe (about 5 billion net, excluding government take) in Guyana, but its Canada/other Americas segment, which excludes oil sands and includes Guyana, has total reserve bookings of about 1.1 billion boe, including only 1.2 billion of new discoveries booked in the last six years.

Reserve bookings are even less applicable for evaluating Exxon’s Permian position. For unconventional acreage, reserves are only booked once wells are drilled, leaving all undrilled acreage with zero associated reserve bookings. This explains why when Exxon estimated Permian net resource to be 10 billion boe, 70% liquids, total US booked reserves were only 4.1 billion boe. Exxon has booked 3.5 billion barrels of liquid reserves in the US since 2015 as it has drilled wells. Its most recent recoverable resource estimate in the Permian, including Pioneer, is 18 billion barrels.

The company's current reserve base largely does not reflect Guyana and Permian's potential to uplift returns. Both regions are expected to drive new volumes over the next five years and command nearly 40% of upstream spending, by Rystad’s estimates, although Permian spending will depend on oil prices, given its flexibility. These areas will constitute 70% of upstream spending, including LNG, according to Exxon.

In Guyana, Exxon expects to have eight floating production storage and offloading units with a gross capacity of 1.7 mmb/d in 2030, compared with 1 FPSO and 30 mboe/d net in 2020. Meanwhile, Permian production should rise to 2.5 mmboe/d in 2030, compared with 1.8 mmboe/d in early 2026 and 550 mboe/d in 2022, largely due to the addition of Pioneer's assets.

In total, we expect upstream earnings per barrel to increase to $13/bbl at $65/bbl, well below historical levels at higher prices but higher than the $10/bbl in 2018 when oil prices were $71/bbl Brent. The implied margin expansion is largely due to the mix shift as Exxon adds higher-margin volumes from Guyana and high-return Permian liquids volumes. Assuming modest growth in capital employed and the associated earnings improvement, we estimate Exxon can improve total upstream ROCEs to nearly 13% within our forecast period, below historical levels, but enough to earn a narrow economic moat for the segment.

Exxon's downstream and chemicals position remains strong and is set to improve. Investments are focused on improving yields of higher-value products, which should drive margin expansion and higher midcycle earnings capacity than in the past.

The size and physical integration of Exxon’s refining and chemical manufacturing operations create an unequaled advantage peers cannot easily replicate. Approximately 80% of its refining capacity is integrated with chemical manufacturing facilities. The integrated network delivers wider margins and returns than peers, thanks to a low-cost position derived from economies of scale and the ability to process a variety of feedstocks into the highest-value products. Combining the two should also create more value as transportation fuel demand wanes and chemical demand grows over the next decade.

Exxon's combined downstream and chemical segments’ returns on capital employed have historically far outpaced the group average, and while returns have been below upstream’ s at times, they have been much more consistent. From 2010 to 2014, downstream and chemical combined returns averaged 18% compared with 17% from 2015 to 2019. We expect the combined segments’ returns to steadily recover from 2020 troughs and reach 20% by the end of our forecast, based on improved market conditions and investments to increase high-margin products.

Exxon is committing only a relatively small amount of capital ($20 billion by 2030) to low-carbon technologies and is not reorienting its business model away from oil and gas production. This investment will also depend on developing marketable products and policy support while moving toward areas where Exxon has, or can develop, expertise. Given the modest amount and gating process, we do not see a threat to the moat from these assets whose moat potential remains highly uncertain.

Exxon responded to shareholder concerns by hiring outside managers in key roles, appointing new board members, and increasing disclosures.

Exxon will see its portfolio mix shift toward liquids pricing as gas volumes decline and new oil projects come online. Cash margins are expected to improve as a result, thanks to increased volumes from Permian and Guyana.

With coordination between upstream and downstream operations, as well as integrated refining and chemical facilities, Exxon achieves a high level of integration that creates value instead of simply owning the assets.

Exxon's increased spending to grow volumes risks resulting in lower returns as it did previously. The timing could be off, given the current global oversupply and soft demand. Lower oil prices would result in lower-than-expected earnings.

Despite activist pressure and new board members, Exxon has not sufficiently reduced hydrocarbon investment levels and continues developing long-life projects with a high risk of becoming stranded.

Exxon's low-carbon investments could disappoint, as delays and lack of government support erode expected returns.