ExxonMobil Keen on the Long Game

Oil major ExxonMobil (NYSE: XOM  ) has in the recent past been in the thick of bearish outlooks. Driven by unfavorable natural gas pricing, negative investor sentiment has suppressed the oil bigwig's share price and hobbled growth. Interestingly, ExxonMobil is not alone in this. Chevron (NYSE: CVX  ) and Chesapeake (NYSE: CHK  ) , among other competitors, are also crushing under the weight of low natural gas prices. The effect of ExxonMobil's exposure to natural gas was reflected in its lackluster performance over the past year. Despite this, ExxonMobil is not backing down. Why is this so?

Natural gas benefits outstrip near-term balance sheet woes
Low natural gas pricing negatively affected ExxonMobil's performance during the second quarter. Net income fell 57% year on year to come in at $1.55 a share, the lowest quarterly EPS number since September 2010. Fellow Fool Bob Ciura points out that Chevron also posted a slip, albeit smaller, during the same period. Its quarterly net income dipped 26%. Chevron has spread its natural gas efforts beyond the U.S. to global markets like Australia and Africa. This has allowed it to avoid some of the headwinds affecting ExxonMobil in the U.S. Indeed, ever since ExxonMobil bought the then largest holder of natural gas reserves, XTO Energy, in 2009 for $41 billion, Chevron's shares have clocked gains twice as big as ExxonMobil's. Chesapeake is also sweltering under the heat as signaled by its recent move to pass natural gas costs to land owners in Pennsylvania through increased deductions on royalty checks. The unpopular move, although supported by law, has seen deductions increase from the typical 5% to 10% range to an excess of 60%.

The snippet above reveals the impact that low U.S. natural gas prices had on the performance of oil majors over the past year. While Chesapeake and Chevron have taken corrective measures, ExxonMobil continues to wade in the waters. This is primarily because of the long-term benefits of natural gas.

ExxonMobil predicts that natural gas demand will track upward over the next three decades to 65%, exceeding coal as a source of energy. This is welcome news not only for the energy sector, but for other industrial players as well. Ethane and other liquids from natural gas are essential raw materials for plastic and other crucial products. At the Shale Insight 2013 conference in late September, ExxonMobil Chemical Company Chairman Steve Pryor pointed out that other industrial sectors accounted for close to 30% of U.S. natural gas demand. This presents a huge opportunity for ExxonMobil as it will be able to grow its top line while at the same time increasing its number of revenue streams.

Other than presenting alternate revenue streams, natural gas positions ExxonMobil at the heart of a U.S.-led global energy revolution. U.S. natural gas prospects remain a huge threat to OPEC. While no candid concerns have been raised by OPEC, the commencement of U.S. natural gas exportation will certainly have an impact on OPEC's grip on the global oil market. Prices will bow to the forces of supply and demand as opposed to OPEC's preset production quotas. This will allow U.S. natural gas players, ExxonMobil being one of them, to penetrate deeper into previously inaccessible markets. The effect that this will have on ExxonMobil's growth will be tremendous.

Underlying strategy protects shareholders
While the prospects offered by continued natural gas drilling are engaging, investors remain cautious about ExxonMobil's thinning margins. Shouldn't it follow in the steps of its peers and reduce exposure in favor of safeguarding margins?

ExxonMobil has an underlying strategy that protects shareholders against thinning margins and ensures consistent dividends.

The chart below offers a deeper insight:

Source: Morningstar

Over the past nine years, ExxonMobil's share repurchase programs have reduced shares outstanding by 30.5%. This not only has an effect of increasing EPS, but it also allows ExxonMobil to continue paying reasonable dividends even in the face of thinning margins. This partly explains why the oil behemoth has been able to increase dividends for the past 31 consecutive years.

Fool's takeaway
ExxonMobil's heavy exposure in the natural gas sector doesn't come short of risks. However, the fact that it has underlying measures to preserve shareholder value and keep income investors happy says volumes about its commitment to shareholders. Going forward, natural gas prices will adjust to global demand. ExxonMobil investors will not only enjoy the typical solid dividend payouts, but also great growth. ExxonMobil is a strong long-term buy.

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  • Report this Comment On October 10, 2013, at 3:58 AM, conrademaher wrote:

    ExxonMobil and other majors hate these treadmill plays where the first year decline rate exceed 50%. They worked feverishly all through the 80's and 90's to shed much better prospects because these prospect were 80% of their assets and brought in only about 20% of their profits. If they had done a deal with the people running these small projects/fields to operate the fields and keep a good percentage of the increased production and reserves, the 80% of their assets would have increased their contribution to income up to 50% of the total. The decline in these assets would have been very low (about 10% per year). Exxon just did not have any place to go to replace reserves. Their last big reserves replacement was buying Mobil. Mobil had under booked reserves by about 50% as most companies do. Many reasons, but SEC, Bonuses and incompetence in assessing ultimate recovery cover the main reasons. The under booked reserves would have had a value about equal to what Exxon paid for Mobil. Thus, they essentially got these reserves and all of Mobil's prospects for free. Now there are no longer any easy to pick fruits to replace reserves and ExxonMobil are forced to participate in the rat race of Shale Gas and Shale oil. They hope for better prices in the long term for produced gas, but expensive gas replacing low cost gas is never going to provide the margins that this giant company needs. They are doomed.

  • Report this Comment On October 10, 2013, at 11:30 AM, Yieke wrote:

    Interesting perspective there. I agree with you on some parts. However, I believe that natural gas will ultimately provide the needed margins. OPEC's grip is loosening and there are currently unexplored markets that present prospects with regard to both volumes and margins. In addition, the fact that countries such as Russia and China have also commenced natural gas exploration will give U.S a reason to use natural gas to further its business and geopolitical interests. Once things go down this path, you can be certain that prices will trend upward.

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