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ExxonMobil's Management Hears Your Concerns and Is Doing Something About Them

By Tyler Crowe - Sep 10, 2018 at 4:21PM

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Its leadership has been under pressure for faltering production volumes and pedestrian rates of return. Here's its response.

For years, the quarterly conference call for ExxonMobil (XOM 2.35%) was as revealing as a Bill Belichick postgame press conference. Investors gave management quite a bit of slack for being so tight-lipped in the past because the company put up rates of return that were well ahead of its peers.

Recently, though, production slides and eroding rates of return have led to investors clamoring for more transparency. So this past quarter, ExxonMobil started to open up by bringing in executives to explain the goings-on in the company and to field analyst questions during its quarterly conference call

Here are a few things we learned from the new, more-open ExxonMobil and what investors should take away from the conference call:

Floating offshore production facility

Image source: Getty Images.

The production decline ends now

For the past few years, many investors and Wall Street analysts have become increasingly concerned with Exxon's production numbers, which have been steadily declining. Fortunately, increasing oil prices and results from its refining and chemical segment have helped to increase earnings despite the lower production volumes. But it is a large part of the reason Exxon's earnings results haven't recovered as quickly as others in the business, and why the company's best-in-class returns on investment have fallen in line with its peers. 

According to Senior Vice President Neil Chapman -- the executive on the most recent call -- things should start to improve from here on out: "This quarter was a low point in terms of volumes in the upstream and downstream. Absent of some unknown or extraordinary event, volumes will steadily increase through the second half of the year."

Chapman said that for 2018, production will be more or less flat compared with the prior year. Some of the gains will come from bringing back on line some assets hurt by unplanned events -- an earthquake near its Papua LNG facility and a fire at the Syncrude oil sands facility in Canada. And the growth driver in this early part of the recovery will be its shale-oil drilling in the Permian Basin.

It was part of the plan

As weird as it sounds, some of ExxonMobil's production decline over the past few years has been deliberate. As Chapman mentioned, these declines were not a product of poor operational performance, but a capital allocation decision:

As I've commented previously, all volumes are not equal. There is a range of profitability on the volumes we produce. Our focus is on value, so we will continue to upgrade our mix and strengthen our portfolio. In other words, there's no structural change in the upstream business from the perspective that I provided to all of you in March.

Some of the places where it was drilling -- for shale natural gas in the U.S. -- weren't producing the returns management desired, and it didn't have enough downstream assets like chemical manufacturing to take advantage of the cheap feedstock. So rather than keep producing for the sake of producing, it wound down some of its operations in U.S. shale gas to spend money in other places, like its lucrative offshore discoveries near Guyana.

Guyana gets better by the day

Speaking of Guyana, this is an offshore discovery that management has fast-tracked for development. From discovery to first oil is going to be around five years, which is the offshore equivalent of going to ludicrous speed. It seems as if every quarter, the company has some news about an additional discovery, a resource estimate increase, or a new plan to pump more oil from this prospective block. This past quarter was no different, as Chapman updated us on Guyana:

Estimated gross resources for the block pending assessment of the latest discoveries is now more than 4 billion oil equivalent barrels, and that's up from the 3.2 billion that I communicated in March, just four months ago. We made the eighth discovery on the block with the Longtail exploration well, which encountered over 256 feet of high-quality oil-bearing sandstone, and establishes the Turbot area as a potential hub of over 500 million oil equivalent barrels recoverable.

We're currently making plans to have a second exploration vessel offshore Guyana, bringing our total number of drillships on the Staebroek block to three. The new vessel is planned to operate in parallel to the Stena Carron to explore the block's numerous high-value additional prospects. The collective discoveries on the block to date have established the potential for now up to five FPSOs [floating production, storage, and offloading vessels] producing over 750,000 barrels per day by 2025, the potential for additional production from a significant number of undrilled targets, and plans for rapid exploration and appraisal drilling. You may remember in the March meeting, I was outlining that we have three FPSOs in our plan, and we were looking at a production level of 500,000 barrels per day, so it's a significant increase.

By 2025, ExxonMobil is targeting production rates of 5 million barrels per day. It has already made the case that production from its Permian Basin shale will be about 750,000 barrels per day, so the addition of Guyana at 750,000 barrels per day would mean that these two assets could represent as much as 30% of production by then. 

Spend, or reap the benefits

One of the reasons that many of ExxonMobil's peers are seeing significant increases in earnings and cash flow lately is that they have gone into what you could call a harvest of resources. Basically, they have brought a significant portion of projects into service recently, and are now winding down capital spending to reap the benefits of their labors. 

Exxon, on the other hand, is spending heavily compared to its peers on more earlier-stage projects and exploration of new resources, as Chapman explained on the call:

If you don't invest in the upstream ... If you don't invest at all, you're going to get a 6% decline across the business. So, it's very important you invest, but it's not just about adding capacity, it's about adding quality capacity. I don't know -- you'll have to ask our competitors why they are not investing in new projects. All I can tell you is, we have very, very good projects, the best that we have had since the merger. And what I wanted to do -- what we wanted to do and [CEO Darren Woods] wanted us to do -- is be very transparent with the investment community on what those projects are, be very transparent in terms of why we're investing in them. 

Finding oil in exploration isn't guaranteed, and recently there haven't been a lot of successful exploration finds. Exxon thinks that it is staying ahead of the competition by green-lighting more exploration work. Whether that strategy pays off or not will likely take years to determine. But it is a strategy that ExxonMobil has employed for years, and what has made it one of the most successful oil companies over the decades. 

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