Post by blueneck on May 17, 2008 5:51:30 GMT -6
Is ExxonMobil's future running dry?
The petroleum giant is shying from risky exploration and spending money on buying back stock. Over the long haul, those moves could lead the company to go private or disappear.
By Jim Jubak
Are we witnessing the death of ExxonMobil (XOM, news, msgs)?
Strange question to ask with oil above $120 a barrel and ExxonMobil reporting $11 billion in first-quarter profits?
Not if you understand that ExxonMobil's management has bet the company. If that bet is wrong, over the next 15 years or so, investors will get to watch the gradual disappearance of ExxonMobil.
In one scenario, the company disappears as a public company, going private by 2018 after buying up all its public stock. In another, the company simply liquidates as it distributes its cash to shareholders until there's nothing left.
Far-fetched? Not at all. The warning signs were pasted all over the company's May 1 earnings report.
Yes, revenue for the quarter was up 34%, to $117 billion, from the first quarter of 2007. And, yes, net income climbed 17%, to $10.9 billion.
But production of oil and natural gas was down almost 6%.
Why falling production?
ExxonMobil had an explanation, of course. The company's lower production was a result of resource-rich countries' demands for bigger shares of oil and natural-gas production as prices climbed, the decline of older fields and the loss of production when Venezuela nationalized ExxonMobil operations in that country in 2007.
All true. There were short-term, one-time reasons for production to fall in the first quarter of 2008. But don't conclude that ExxonMobil's problems are limited to that quarter. All the evidence argues that the company will report lower oil and natural-gas production for all of 2008, even though new projects are scheduled to come on line in the second half of the year. Looking just at oil, the company's production will not grow at all through 2012.
How do we know? Because that's what the company told Wall Street at its March 2008 annual meeting with analysts. You should know as well that the company's projections have a history of being too optimistic. So there's a good chance that when ExxonMobil actually reports production for that period, investors will see not flat but falling oil production.
Proven reserves declining
The company also reduced its projections for annual production to 4.5 million barrels of oil equivalent a day in 2012 from the 4.8 million barrels a day in 2011 that it projected a year ago. Just further evidence that ExxonMobil has a production problem.
But falling production is only part of the problem, the consequence today of a longer-term problem that seems to worsen each year. You see, not only is production likely to stay flat or fall through 2012, but proven oil and gas reserves are declining. Proven oil and gas reserves fell by 3.1% at year-end 2007 from the end of 2006, according to Standard & Poor's.
What's going on here? If any oil company in the world should be able to find more oil and natural gas, it's ExxonMobil, with its immense reserves of both engineering skills and cash resources.
Plenty of cash -- and challenges
Well, part of the problem is one that ExxonMobil shares with every other Western oil company: access to new places to drill. In the 1970s, Western oil companies controlled about 70% of all the world's proven and probable reserves. The rest belonged to the national oil companies of oil-producing countries.
Today, though, the positions of the Western and national oil companies are reversed. Now the national oil companies control about 80% of the world's proven and probable reserves, and they're keeping the most promising geologies for themselves. As a result, Western oil companies with the cash reserves of an ExxonMobil, a Chevron (CVX, news, msgs) or a Royal Dutch Shell (RDS.A, news, msgs) simply don't have enough places to put their cash to work.
Further, that money doesn't go as far as it used to when it comes to finding new reserves. The places Western oil companies can put their money to work are among the world's most hostile environments and most challenging geologies: in Siberia or beneath a mile of water and a mile of salt, for example.
The high price of finding oil
And because so many oil companies, Western and national, are exploring for new reserves, and because so many companies are competing to use the world's limited supply of extreme exploration and production equipment in challenging geologies, the cost of exploration has exploded. Oil-field inflation is estimated at 15% or more in 2007.
So when ExxonMobil told Wall Street in March that it would raise capital spending to $25 billion to $30 billion a year from the prior $22 billion, it was really talking about an increase of 13.6% at the low end that actually lost ground to oil-field inflation and an increase of 36.4% at the high end. In dollars, that's an increase at the high end of about $4.7 billion above inflation.
Russia soon will be a key player driving oil prices, MSN Money's Jim Jubak says. Investors can only hope that runaway inflation and a rickety banking system won't stop the oil flow.
Could ExxonMobil reinvest more in the business of finding oil? Absolutely. The company spent $8 billion in the first quarter of 2008 alone.
But ExxonMobil has decided not to.
A culture of investment discipline
Other oil companies may be scrambling to find oil in every nook and cranny. Other oil companies may be willing to invest billions in risky and potentially marginal fields. But not ExxonMobil. In management's estimation, investing more in exploration and development would not be a sound business decision at this time. Such investments would not generate the high level of return the company targets in its investment decisions.
To understand those decisions, you've got to understand ExxonMobil's corporate culture. This is a company that prides itself on making very disciplined investment decisions, based always on the return on invested capital.
Continued: Buying back its stock
Read the rest here articles.moneycentral.msn.com/Investing/JubaksJournal/IsExxonMobilsFutureRunningDry.aspx
The petroleum giant is shying from risky exploration and spending money on buying back stock. Over the long haul, those moves could lead the company to go private or disappear.
By Jim Jubak
Are we witnessing the death of ExxonMobil (XOM, news, msgs)?
Strange question to ask with oil above $120 a barrel and ExxonMobil reporting $11 billion in first-quarter profits?
Not if you understand that ExxonMobil's management has bet the company. If that bet is wrong, over the next 15 years or so, investors will get to watch the gradual disappearance of ExxonMobil.
In one scenario, the company disappears as a public company, going private by 2018 after buying up all its public stock. In another, the company simply liquidates as it distributes its cash to shareholders until there's nothing left.
Far-fetched? Not at all. The warning signs were pasted all over the company's May 1 earnings report.
Yes, revenue for the quarter was up 34%, to $117 billion, from the first quarter of 2007. And, yes, net income climbed 17%, to $10.9 billion.
But production of oil and natural gas was down almost 6%.
Why falling production?
ExxonMobil had an explanation, of course. The company's lower production was a result of resource-rich countries' demands for bigger shares of oil and natural-gas production as prices climbed, the decline of older fields and the loss of production when Venezuela nationalized ExxonMobil operations in that country in 2007.
All true. There were short-term, one-time reasons for production to fall in the first quarter of 2008. But don't conclude that ExxonMobil's problems are limited to that quarter. All the evidence argues that the company will report lower oil and natural-gas production for all of 2008, even though new projects are scheduled to come on line in the second half of the year. Looking just at oil, the company's production will not grow at all through 2012.
How do we know? Because that's what the company told Wall Street at its March 2008 annual meeting with analysts. You should know as well that the company's projections have a history of being too optimistic. So there's a good chance that when ExxonMobil actually reports production for that period, investors will see not flat but falling oil production.
Proven reserves declining
The company also reduced its projections for annual production to 4.5 million barrels of oil equivalent a day in 2012 from the 4.8 million barrels a day in 2011 that it projected a year ago. Just further evidence that ExxonMobil has a production problem.
But falling production is only part of the problem, the consequence today of a longer-term problem that seems to worsen each year. You see, not only is production likely to stay flat or fall through 2012, but proven oil and gas reserves are declining. Proven oil and gas reserves fell by 3.1% at year-end 2007 from the end of 2006, according to Standard & Poor's.
What's going on here? If any oil company in the world should be able to find more oil and natural gas, it's ExxonMobil, with its immense reserves of both engineering skills and cash resources.
Plenty of cash -- and challenges
Well, part of the problem is one that ExxonMobil shares with every other Western oil company: access to new places to drill. In the 1970s, Western oil companies controlled about 70% of all the world's proven and probable reserves. The rest belonged to the national oil companies of oil-producing countries.
Today, though, the positions of the Western and national oil companies are reversed. Now the national oil companies control about 80% of the world's proven and probable reserves, and they're keeping the most promising geologies for themselves. As a result, Western oil companies with the cash reserves of an ExxonMobil, a Chevron (CVX, news, msgs) or a Royal Dutch Shell (RDS.A, news, msgs) simply don't have enough places to put their cash to work.
Further, that money doesn't go as far as it used to when it comes to finding new reserves. The places Western oil companies can put their money to work are among the world's most hostile environments and most challenging geologies: in Siberia or beneath a mile of water and a mile of salt, for example.
The high price of finding oil
And because so many oil companies, Western and national, are exploring for new reserves, and because so many companies are competing to use the world's limited supply of extreme exploration and production equipment in challenging geologies, the cost of exploration has exploded. Oil-field inflation is estimated at 15% or more in 2007.
So when ExxonMobil told Wall Street in March that it would raise capital spending to $25 billion to $30 billion a year from the prior $22 billion, it was really talking about an increase of 13.6% at the low end that actually lost ground to oil-field inflation and an increase of 36.4% at the high end. In dollars, that's an increase at the high end of about $4.7 billion above inflation.
Russia soon will be a key player driving oil prices, MSN Money's Jim Jubak says. Investors can only hope that runaway inflation and a rickety banking system won't stop the oil flow.
Could ExxonMobil reinvest more in the business of finding oil? Absolutely. The company spent $8 billion in the first quarter of 2008 alone.
But ExxonMobil has decided not to.
A culture of investment discipline
Other oil companies may be scrambling to find oil in every nook and cranny. Other oil companies may be willing to invest billions in risky and potentially marginal fields. But not ExxonMobil. In management's estimation, investing more in exploration and development would not be a sound business decision at this time. Such investments would not generate the high level of return the company targets in its investment decisions.
To understand those decisions, you've got to understand ExxonMobil's corporate culture. This is a company that prides itself on making very disciplined investment decisions, based always on the return on invested capital.
Continued: Buying back its stock
Read the rest here articles.moneycentral.msn.com/Investing/JubaksJournal/IsExxonMobilsFutureRunningDry.aspx