Why Do Investors Put Up With Oil and Gas Madness?http://www.fool.com/investing/general/2014/02/02/why-do-investors-put-up-with-oil-gas-madness.aspx Sara Murphy
February 2, 2014
Royal Dutch Shell (NYSE: RDS-A) just announced that it had a terrible 2013, but management wants to assure you that this year will be better. ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) had disappointing results, too, but they are full of confidence in their strategies for the future. Why on earth do investors believe that the same factors that were responsible for past failures will suddenly drive success going forward?
High capex costs, tight margins, bad Juju
The payoff may never come. After dropping all that dough on these projects, Shell, ExxonMobil, and Chevron may never be able to burn a fair amount of what they extract. The mainstream is increasingly becoming aware of the potential for a carbon bubble, which could strand hydrocarbon assets.
Just look at how things went at the recent World Economic Forum in Davos. The CEOs of major blue-chip companies were practically begging for climate change regulation. If regulators pursue some of the widely proposed measures -- such as putting a price on carbon -- the breakeven point on any extraction project changes dramatically. Then it becomes all about the cost curve, and the most expensive exploration projects will be the first to fall to the inexorable power of economics.
A little credit
Ben Van Beuren, Shell's new CEO, said the company planned in 2014 to focus more on profitability, rather than on increasing oil and gas output. That's welcome news, especially since Shell had a reserve replacement ratio of 131% in 2013, which means the company has a strong asset base to support it. Van Beuren said that Shell would work to enhance capital efficiency in 2014, with "hard choices on new projects, reduced growth investment, and more asset sales."
Maybe ExxonMobil thinks that its late-2013 output rebound justifies such claims. The problem is that much of that uptick comes from a Canadian oil sands project, the cost of which ballooned well past budget, and which could come under immediate threat if carbon ever gets priced. It seems a fragile basket into which to put one's eggs.
Meanwhile, Chevron is spending like a drunken sailor. Last year, Chevron pumped a stunning $42 billion into oil and gas projects and intends to up that by an additional $40 billion in 2014. This cash gusher was enough to freak out SEC regulators, who have demanded that Chevron explain why it thinks costs won't balloon even further, and why the company thinks its liquidity won't be compromised. Chevron says it'll get back to the SEC.
All three companies are pushing ahead with other megaprojects that smack of desperation. Here's a little taste:
The bird's-eye view
1. In 2013, Shell, ExxonMobil, and Chevron together spent more than $120 billion to soup up their oil and gas output. The Wall Street Journal points out that in today's dollars, that's what it cost us to put a man on the moon.
2. The companies have yet to see a payoff, and they may never if the carbon bubble s