Are ExxonMobil's Reduced Capital Expenditures Cause for Concern?

ExxonMobil, like Chevron and Royal Dutch Shell, will cut spending in 2014 after spending heavily over the past few years. That will make it tough to reverse last year's decline in production.

Mar 7, 2014 at 10:05AM

Oil and gas behemoth ExxonMobil (NYSE:XOM) upset the market on March 5 when it told analysts it would cut spending this year. The news was not well-received, and the company's shares fell hard on the day of the announcement. ExxonMobil is tightening its belt this year, and there are clear worries that there's a lack of suitable investment opportunities out there for the taking.

Reduced capital expenditures is a recurring theme going on right now across the oil and gas industry. Other global super-majors including Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS-B) are adopting similar strategies this year, so it's not as if this is an ExxonMobil-specific issue.

Still, ExxonMobil's oil-equivalent production fell last year. Investors were clearly hoping to see a turnaround in production this year, which will be very difficult now that ExxonMobil is cutting capital expenditures.

ExxonMobil's investment plan this year and beyond
In all, ExxonMobil expects to allocate $39.8 billion to capital expenditures in 2014. This represents a measurable decline from the more than $40 billion spent last year. ExxonMobil believes 2013 will represent a peak year for investment, particularly when it comes to acquisitions. ExxonMobil does not expect to pursue any acquisitions this year or through 2017.

ExxonMobil's budget restriction echoes what Chevron told its own investors. Chevron also expects to spend $39.8 billion in 2014. That would be a $2 billion reduction from 2013 expenditure levels. In the same vein as its bigger brother, Chevron told investors that 2013 would be a peak year for investments after making several resource acquisitions over the past few years, that would not recur in subsequent years. And, like Chevron, ExxonMobil will devote the vast majority to upstream projects, although ExxonMobil's budget will call for a decline in overall upstream spending.

Of course, ExxonMobil's upcoming budgetary restrictions are nothing compared to the axe Royal Dutch Shell is taking to its own spending. Shell plans to reduce capital expenditures by $9 billion in 2014, from $46 billion in 2013 to an estimated $37 billion this year. That represents a severe 20% drop, and calls into question whether Shell will report satisfactory production and cash flow over the next several years.

ExxonMobil and Chevron are projecting equal capital expenditures, but there's reason for ExxonMobil investors to be concerned considering the fact that ExxonMobil is a much bigger company than Chevron. ExxonMobil is almost twice as large as Chevron by market capitalization, so it's clear that ExxonMobil is really tightening its belt. Plus, ExxonMobil warns investors that longer-term spending will keep falling. It's going to hold capital expenditures at approximately $37 billion per year from 2015-2017.

Upstream feeling the effects
Not surprisingly, ExxonMobil doesn't see production improving this year. In fact, production is expected to be flat in 2014 after falling 1.5% last year, and will increase only 2%-3% per year from 2015-2017. A major contributor is lackluster gas production. High-margin liquids production is expected to rise 2% in 2014, but gas production is projected to drop by 2% this year.

ExxonMobil hopes to realize modest production growth through its existing projects, which should ramp-up this year and beyond after several years of intense investment. In all, ExxonMobil is pursuing more than 120 projects, 21 of which should reach start-up status by 2017. The majority of these will be concentrated in the Americas, spread across some of the highest-potential regions including the Permian Basin, the Bakken formation, and the Marcellus and Haynesville shale plays.

Nearer-term, ExxonMobil points investors to its 10 major project start-ups planned this year, which represents a company record. Management is clearly focused on developing the sizable amount of resources it's acquired over the past few years. Spending over the next few years will fall, but management is confident it can keep production going in the right direction thanks to its existing upstream projects. Pressure is on ExxonMobil to deliver, and time will tell if the decision to cut spending is a wise one.

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