Geopolitical Turmoil Takes Its Toll on ExxonMobil

Investors weren't too keen on ExxonMobil's decision to cut 2014 spending, and the troubles don't end there.

Mar 10, 2014 at 11:17AM

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ExxonMobil had a pretty rotten week. On March 5 it announced that it would reduce capital expenditures this year, after having "peaked" in 2013. Its 2014 spending will hit $39.8 billion, down 6% from $42.5 billion last year. While that may seem like a good thing (cutting costs), investors apparently didn't like the idea – its stock price dropped 2.7% during midday trading as a result, ending the day as the biggest decline on the Dow Jones Industrial Average. Investors are growing concerned that ExxonMobil may be running out of good projects to invest in. Exxon's production was down by 1.5% in 2013 from a year earlier, and the firm believes it will only remain flat through this year. Meanwhile Exxon's costs on a per barrel basis are rising. It cost them $11.48 to produce a barrel of oil equivalent in 2013, sharply up from $9.91 in 2012.

But there troubles didn't end there. Although great uncertainty remains, ExxonMobil may also suffer some damage from the unfolding Ukrainian crisis. Its biggest non-U.S. oil project is a collaboration with Russia's Rosneft in the Arctic, where it has billions of dollars of investments at stake. If the U.S. and the EU slap sanctions on Russia for its incursion into Ukraine and its support for the pending referendum in Crimea, Exxon could face restrictions on doing business in Russia. This would imperil its plans to drill later this year. Exxon has the rights to drill on 11.4 million acres in Russia, which represent holdings for the company that are only surpassed by its acreage in Texas, its home state. ExxonMobil CEO Rex Tillerson tried to assuage concerns at its annual meeting with analysts, "There has been no impact on any of our plans or activities at this point, nor would I expect there to be any, barring governments taking steps that are beyond our control."

In Ukraine too, Exxon has had to pull back. On March 5 company officials stated that their interest in drilling offshore Ukraine for natural gas will be put on hold. Fortunately for Exxon, it hadn't yet sunk a lot of money in the prospect, but its opportunity there is effectively cut off for the foreseeable future. Ukraine has been eager to see its offshore gas deposits extracted in order to lessen its dependence on Russia. Exxon hoped to tap Ukraine's Skifska field, which holds an estimated 200-250 billion cubic meters of natural gas.

On March 7, Exxon received another piece of bad news. Kazakhstan announced that it is suing Exxon, and its partners (Royal Dutch Shell, Total, and Eni) for the consortium's failure to develop the giant Kashagan oilfield in the Caspian Sea. The project, now in its 13th year, has suffered serious delays. The consortium has spent a combined $50 billion on the project. Kashagan is the world's largest oil discovery in 35 years. Production began in September 2013 but was quickly halted due to pipes leaking natural gas. The consortium began flaring the gas, and the Kazakh government is seeking a $737 million fine from the companies for the pollution. The Kazakh government may not reimburse the consortium for its costs and the latest move to sue may be an attempt by the government to seize a greater share of the project from the private companies.

The string of bad news comes as rising costs and flat output have raised questions about the firm's trajectory. Exxon's CEO Tillerson had to answer questions during his presentation about whether or not the firm had become too big for its own good. He tried to reassure investors that Exxon is sufficiently diversified to weather geopolitical storms as well as improve production, but judging by the company's stock price as of late (down 7% YTD), investors aren't so sure.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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