The global oil and gas industry is enormous, and serving the endless global appetite for oil and gas has propelled many companies into the realm of the mega-caps. Were they independent entities, the revenues of companies like Exxon Mobil (XOM), BP (BP) and Royal Dutch Shell (RDS.A) would be such that they’d be among the 30-largest countries by GDP. Not surprisingly, that makes them highly significant stocks as well [for more oil and gas news and analysis subscribe to our free newsletter].
While worries about pollution, political turbulence and long-term economic supplies have fueled the development of alternative energy sources like solar, wind, geothermal and so on, we are at best decades away from a point where oil and gas don’t make the world go round. Accordingly, it still makes ample sense to brush up on the key players in this sector.
Exxon Mobil’s primary business is pretty simple – it looks for oil (and gas), it pumps it out, it ships it and sells it. Exxon is the largest oil company in the world, with over $480 billion in annual revenue and operations around the world. Wherever oil and gas may be, Exxon is there too; Exxon produces both onshore and offshore, in conventional reservoirs and unconventional shales, both in North America and abroad.
Exxon Mobil’s reserve base is enormous, with 87 billion barrels of oil equivalent (BOE) in its resource base. The company’s proved reserves total over 25 billion barrels BOE, good for a reserve life of 16 years based on recent production figures. Exxon has been actively looking harder for oil and liquids, and that has led to a slight shift in its reserve base – from 49% liquids in 2011 to 51% in 2012 [see How To Profit From Record U.S. Oil Production].
Exxon is also a very large refiner of oil. Exxon has over 6 million barrels of daily refining capacity around the world, with much of that spread across North America, Europe and Asia.
Exxon Mobil’s foreseeable future is likely to look a lot like its recent past and present – the company will continue to invest huge sums of money into discovering (or buying) new reserves of oil and natural gas and bringing those reserves online and into full production. Exxon has invested considerable sums into areas like offshore Africa, the U.S. Bakken shale and Australia, and will look to these regions to keep production increasing (likely at a low annual percentage rate).
Exxon Mobil has seen the cash return on investment decline over time, and that too is likely to continue into the future. It is getting increasingly expensive to find and exploit new energy reserves and Exxon has to lean more and more on advanced services and equipment to do so – shrinking the return on investment.
The biggest unknowns in Exxon’s future revolve around global energy prices and politics. While unconventional shale plays like the Bakken have revolutionized North American energy, the reality is that companies like Exxon and Chevron (CVX) will continue to need relatively cooperative foreign governments to grow their reserves and production; if governments refuse to cooperate (say, to the advantage of local firms), Exxon would be hard-pressed to maintain production [see Company Spotlight: Chevron Corporation (CVX)].
Energy prices and development costs are also going to have a major role in Exxon’s future. The recent low price of natural gas has led many companies to deprioritize (or stop outright) natural gas production, and there are economic breakpoints for every energy company at which point production/development doesn’t make economic sense. With upstream profit margins running at about $18/barrel, there isn’t exactly ample room for lower energy prices absent a big decline in production costs, which seems very unlikely.
Risks & Rewards
As mentioned above, the biggest risk to Exxon is an inability to economically find and develop energy reserves. The economy also matters. By and large, when the economy declines so does energy demand and that leads to lower realized prices and profits for Exxon. From an investor’s perspective, though, the biggest risk to Exxon is an inability to properly allocate capital – spending too much money to develop reserves and being unable to produce oil and gas at economically viable prices will destroy shareholder value over time [see also California: America’s Next Oil Boom?].
Conversely, the biggest potential reward to Exxon Mobil is improved returns on capital investments. Exxon is really too large now for a single discovery to move the needle on its long-term prospects, so a single positive event is unlikely to offer much reward.
Exxon Mobil has long enjoyed a premium reputation among the energy majors. Not only has the company been relatively savvy in terms of adding reserves at economic prices, the company has been careful to create a balanced portfolio of assets that gives it exposure to almost every relevant trend in the oil and natural gas world.
Unfortunately, Exxon Mobil is so often seen as a safe haven or go-to stock that it enjoys a premium within the space that may not be entirely deserved. On a like-for-like basis, Chevron may be 20% cheaper than Exxon as of early 2013. While Exxon’s demonstrated operational excellence and rich pipeline of projects argues that this premium valuation could stay in place, investors should be aware of the risk of underperformance; if Exxon Mobil starts making poor capital investment decisions and starts to see its per-barrel profits decline, there is a risk of a larger-than-normal decline as Exxon shares could lose that premium [see also 13 High-Yielding Commodities For 2013].
That said, Exxon Mobil is a highly liquid company that offers investors a reasonable proxy for the global energy market. Exxon also pays a respectable dividend and has made the maintenance/improvement of capital returns to shareholders a priority.
Exxon Mobil is something like the vanilla ice cream of the energy sector – you can always find it, you pretty much know what you’re getting with it and sometimes it may be exactly what you want or need. There are a host of more speculative energy plays that will give investors better leverage to movements in oil and/or natural gas prices, as well as leverage to significantly more dynamic production growth.
Exxon, though, is unlikely to fail investors absent a major energy sector meltdown; for better or worse, Exxon has a multi-decade history of coming through. While Exxon’s higher-than-average multiple among the majors is cause for some concern, that multiple also reflects that dependability and predictability which may be a trade that more conservative investors are looking to make.
Disclosure: No positions at time of writing.