After several quarters in a row of lackluster performance and the extremely rare asset writedown, ExxonMobil (XOM +1.69%) got back on track last quarter with robust earnings and cash flows. It was a welcome sign for a stock that is still struggling to distance itself from the lows of the recent oil crash. The one thing that likely had investors a little concerned, though, was the lack of production growth.
Based on some of the company's comments from its first-quarter conference call, however, it looks as though management is asking investors to be patient while showing them the potential that lies ahead. Here are some of the key quotes from ExxonMobil's management that suggest good things should come to investors who wait.
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Another big investment in LNG
Back in March, ExxonMobil announced it had acquired a 25% interest in an offshore block in Mozambique from Italian company Eni. The $2.8 billion price tag is not even close to being the largest acquisition the company has made, and it's even odder since ExxonMobil typically likes to be the operator of such projects. It would appear that, according to President of Investor Relations Jeff Woodbury, investors need to look at this project for more than just this one purchase because it is just a piece of a larger puzzle:
ExxonMobil signed an agreement to acquire a 25% indirect interest in Area 4 offshore Mozambique for a cash consideration of $2.8 billion. The deepwater Area 4 block is estimated to contain more than 85 trillion cubic feet of natural gas in place, with high expected well deliverability, underpinning a world-class LNG project. We believe the project will be well positioned to supply LNG customers in markets around the world. ExxonMobil will lead the construction and operations of the planned onshore facilities, including liquefaction trains with capacity of up to 40 million tons per annum. As such, ExxonMobil will contribute its expertise in project execution and operations to support the project's success in a globally competitive LNG market. The transaction is subject to regulatory approval. After it has closed, the partners will optimize development plans and determine key milestones such as FID and start-up timing accordingly.
That 40 million ton per year liquefied natural gas (LNG) facility stands out as a remarkable investment. If that does come to pass, that plant alone will equate to the second-largest LNG supplier in the world. When you add that facility with all of ExxonMobil's other LNG facilities either operating or under construction, it's pretty clear that management is steering this company toward more LNG.
Where is the room for all this LNG?
The obvious follow-up question to all that LNG development is how the market could handle that much additional supply. So when asked about all of Exxon's LNG plans, Woodbury stressed that the company isn't trying to pursue all of these facilities at once:
[T]here are a number of LNG projects that we are concurrently progressing. I will tell you that not all of them will move at the same pace. We've got a good, diverse portfolio, some that are associated with brownfield expansions to existing facilities, such as the Papua New Guinea or the Golden Pass and then others more large greenfield developments like Mozambique. Each of them have unique characteristics that we're going to try to place into the market. But it's not choosing one or the other at this point. It's a matter of moving them all forward. And depending on all the different variables that have to work for a multi-billion investment, some will come to maturity quicker.
This is one of the major disconnects between analysts and the people at Exxon making investment decisions: Their respective timelines are wildly different. It's possible that some of these potential LNG investments don't get the green light for another decade depending on economics. The takeaway here is that ExxonMobil has a massive quiver of LNG projects that could keep the company working and growing production for decades.
Short-term oil price decisions
Historically, ExxonMobil has made all its investment decisions on decade-long time horizons, not based on what oil prices are doing today. That philosophy, though, was premised on the company building megaprojects that take years to develop. That dynamic has now changed since the company has a sizable portfolio of short-cycle assets such as shale. This changes how the company views its capital spending outlook. Since it has sizable short-cycle production sources, ExxonMobil does need to think on a slightly shorter time horizon than normal.
So when asked about its view of shorter-term oil prices and how it will affect ExxonMobil's investment decisions, here's what Woodbury said:
[U]nderlying demand growth has been generally strong. We're seeing demand growth of about 1.4 million barrels a day, similar to last year. And that's above the 10-year average. As we would have expected, we're seeing a supply side response to supply and demand coming into balance. And we do see that non-OPEC volumes are growing, particularly driven by North America and specifically the unconventionals. ... [W]hen you step back and look at the supply side is, I think, is the biggest issue in front of us. And that will be a function of so many elements, including the North American response that I talked about but also economic growth and other variables. Remember, we still have, round numbers, about 600 million barrels in storage. And depending on what near-term prices do, that's going to come out at some point. So a lot of variables to think about, and that's what really underpins my comment about just being cautious.
It sounds as though ExxonMobil won't be ramping up production for its shale assets too quickly. Demand rates are running high and have the potential to slide, and there is a lot of storage oil waiting to get sold off at the right price. This suggests that oil prices will remain modest for some time and there is no rush to add additional barrels to the global mix.
Slow to approve new projects
ExxonMobil has a reputation for maintaining a steady hand throughout the commodity cycle. Through good times and bad, it reinvests in its business at rather regular rates. Recently, though, one analyst noted that management hadn't made many final investment decisions (FIDs). What is even more striking about that fact is that oil services costs are cheap right now, so locking in oil services contracts today would pay off substantially down the road.
According to Woodbury, though, one of the reasons that we have seen a slowdown in FIDs isn't because management is being overly cautious. Rather, the rapid cost deflation has changed the economics of several projects, and the company's decision makers want to revisit some of its previous work to see if there are opportunities to do it better than originally planned. Said Woodbury:
I would tell you that there were several factors that we're playing into -- or that play into the pace of our FIDs. One, obviously, being the ability to make sure that we're comfortable, that we've gotten all the value out of the opportunity. Particularly when you're in a down cycle, there are opportunities to step back and look at, are there other ways now, in the current business climate, that we can go ahead and generate more value from it? And we've done exactly that. As I said a moment ago, over the last several years, the projects that have been closer to FIDs, we've been able to get about 30% out of the cost. So it's a very keen sense of where have we -- have we fully optimized the value proposition for these investments? When we get to that point, we've got the financial flexibility to move forward. And we want to make sure that these investments, as we always have historically, are durable in a low-price environment.
With this in mind, it wouldn't be surprising if we saw a slew of FIDs in the coming months. Woodbury did mention that it expects to make a FID on its Guyana oil discovery in a few months, and several other offshore projects are likely going to get the green light now that the bean counters have taken all this cost deflation into consideration.
