ExxonMobil Is Spending Plenty but Growth Is Just Around the Corner

ExxonMobil may be spending more than it can afford, but new projects should make up for the company's spending habits.

Mar 31, 2014 at 12:45PM

In mid-March, the world's largest listed oil company, ExxonMobil (NYSE:XOM), launched a $5.5 billion bond offering. For most companies, tapping the debt market for extra working capital would not be such an issue. However, this is the first time that Exxon has tapped the corporate bond market for cash in two decades, which underlines the cash flow issues oil and gas majors are currently having to grapple with.

Still, this bond offering hardly does anything to tarnish Exxon's highly impressive balance sheet. At the end of 2013, it had net debt of $18 billion, a gearing ratio of 10% -- the new debt issue will push gearing up to 14%. Further, it is paying almost nothing to borrow this extra cash. The debt offer is broken down into five lots, the smallest of which pays interest of 0.24% and the largest of which pays 3.2% -- after factoring in inflation, these interest rates become negative in real terms.  

Nevertheless, Exxon's first dash for cash in two decades highlights the cash crunch the company is having to deal with. It reported record capital expenditures of $42.5 billion during 2013, a figure only just covered by cash generated from operations of $45 billion. Unfortunately, it had hardly any cash left over for dividend or share repurchase commitments, which totaled $28 billion during the year.

With cash flows dwindling, Exxon's management plan to bring a record 10 new projects this year, adding production of 300,000 barrels of oil equivalent per day. Additionally, it has cut capital spending for 2014 to $40 billion, which is then expected to average $37 billion per year during 2015 to 2017.

What's more, Exxon should see a significant boost to earnings from the long awaited start-up of the Kashagan oil field later this year. The Kashagan field is the largest oil discovery in 40 years, and the project to develop the field has required so much investment and expertise that a consortium of oil majors has been required to develop it. The consortium includes Exxon, Royal Dutch Shell (NYSE:RDS-B), Italy's Eni (NYSE:E), and France's Total (NYSE:TOT).

Size and complexity
Kashagan is not just one of the world's largest oil fields, but it has also turned into one of the most complex and expensive oil projects ever. From an initial cost estimate of $57 billion for the life of the project, its development is now expected to cost a staggering $136 billion over its lifetime -- that's 138% more than originally planned.

Kashagan is no simple find-drill-and-produce well. No, the Kashagan field is located within Kazakhstan's zone of the Caspian Sea, meaning that to avoid damage from pack ice in a shallow sea, which freezes for five months of the year, much of the project's infrastructure had to be built on artificial islands. As a result, the project required the construction of a landmass to ensure its long-term survival.

Things were progressing to plan, albeit slightly behind schedule and over-budget as of last September when, finally, the project started up -- but then disaster struck, as a gas leak forced production to stop. To all involved, this was a huge surprise since Kashagan, as you can imagine, has been constructed using the most cutting-edge technologies throughout.

Tests have been made on the pipeline and surrounding environment and results are expected during the next month or so, which should give engineers the data they need to fix the problem and recommence production. To help, precautions have been taken and replacement pipes have been ordered in order to cope with various scenarios, so once engineers know what the problem is, it can be fixed without delay.

In the end, it should be worth it
All in all, despite these delays and troubles, Kashagan is a project worth chasing and, once online, it will add a significant boost to the bottom lines of all involved. For them, sustained production from the field will mean a much-needed boost to cash flows, which have come under pressure during the past few years. In particular, the Kashagan oil field is expected to contain 38 billion barrels of oil. So, if oil continues to trade around $100 per barrel, the project, over its lifetime, could yield revenues of $3.8 trillion -- need I say more? (Exxon and Shell each have just under a 17% stake in the project, amounting to almost $650 billion in revenues each over the life of the project.)

Exxon's dash for cash is nothing to worry about and at such low interest rates the company is almost borrowing the money for free. In addition, it has plenty of new projects coming online during the next two years, which should boost cash flows.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling "OPEC's Worst Nightmare." Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Total SA (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information