ExxonMobil (XOM +0.23%) is the second-largest publicly traded oil and gas company behind the recent IPO of the Saudi Arabian Oil Company. After a rough last five years of revamping its portfolio in an effort to adjust to the new reality of $50 to $70 oil, will Exxon be able to turn it around or will the next five years bring similar results?
The race to 1 million barrels per day
On paper, Exxon's stock looks pretty attractive. A price-to-earnings ratio of 20 and a 5 percent dividend yield place Exxon among both value stocks and dividend stocks, but the company is in growth mode, too.
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In March, ExxonMobil announced its plans to "accelerate Permian output to 1 million barrels per day by 2024." The Permian Basin is the nation's hottest shale play, producing nearly 5 million barrels per day, which is more than a third of total U.S. output and nearly half of U.S. onshore production. Exxon's announcement included the following takeaways:
- Updated plans call for nearly 80 percent more unconventional production.
- A doubling of production in 2018 increased confidence in growth plans.
- Increased spending to generate double-digit returns at low prices.
Exxon's quest comes at a steep cost. The energy stock was able to have such a massive increase in 2018 Permian production thanks to a $6.6 billion purchase of acreage in 2017. Since then, Exxon has continued to expand its Permian operations, and according to Argus Media, which tracks global energy business, "unconventional output rose by 72% from a year earlier to 293,000 BOE/D [barrels of oil equivalent per day] in the third quarter of 2019." Meanwhile, Chevron (CVX +0.66%) is on track to raise its Permian output to 900,000 BOE/D by 2023.
Global growth
Aside from its Permian focus, ExxonMobil's 45% stake in the Stabroek Block offshore Guyana is another multi-billion dollar investment. ExxonMobil expects the Stabroek Block to produce 750,000 barrels of oil per day by 2025, bolstered by up to 120,000 barrels of production from the Liza Phase 1 development starting in 2020. ExxonMobil began producing oil from its Liza Destiny floating production, storage, and offloading vessel (FPSO) in December.
In addition to Guyana, Exxon is making multi-billion dollar investments in the growing liquefied natural gas (LNG) market. The International Energy Agency (IEA) projects that 50 countries will be importing LNG by 2025, up from 10 at the start of the century.Exxon is the operator of the $19 billion Papa New Guinea LNG Project, the operations of which have the capacity to produce over 8 million tonnes of LNG annually. In terms of other LNG projects, Exxon is ramping up investment in the Rovuma LNG project in Mozambique. Recently announced in October 2019, the company plans to invest more than $500 million in the initial construction phase of the project which now has a capacity of over 15 million tonnes of LNG annually.
Exxon has also made bids for the "pre-salt" offshore blocks off the coast of Brazil, one of the largest discoveries over the past few decades. For the time being, uncertainty surrounds Exxon's involvement in these offshore blocks after the November 2019 asset auction went bust.
The adjustment
There's been a running theme for the large integrated oil and gas company: Divest away from stodgy, long-term payoff plays and into quick returns now available in the shale basins throughout the United States. For Exxon, the divestments are fairly extreme, totaling $4.8 billion against $8.7 billion in earnings, and capital expenditures of $22.7 billion as of the nine months ended Sept. 30.
Exxon operates a system from the wellhead to your car in an effort to balance the risks associated with just exploring for and producing hydrocarbons or solely refining them. The upstream side of oil and gas is typically termed a commodity business, whereas the downstream side is a margin game based on the lowest input cost for a barrel of oil and the highest output of gasoline and distillates.
Balanced growth
In early September 2019, the number of onshore operating drilling rigs in the United States fell below 900 for the first time since 2017. Today, the rig count is 800, more or less.
The Baker Hughes Rig Count acts as a yardstick for onshore drilling contractors, which Exxon hires to drill new wells. Despite a trend of fewer rigs, Exxon has 55 operational rigs in the Permian Basin as of the third quarter of 2019, up from 51 in the second quarter and 46 in the first quarter. But that's just the upstream side.
In addition to its rising upstream portfolio, Exxon has the second-largest refining capacity in the world. When crude prices are down, Exxon's refinery margins improve since low-priced Permian oil can feed cheaply and efficiently into Exxon's vast downstream refining infrastructure along the Gulf Coast. In terms of downstream growth, Exxon is currently developing 18 refining and petrochemical facilities.
A look at what's to come
Next year, ExxonMobil will celebrate the 150-year anniversary of its predecessor, Standard Oil. In five years, Exxon plans to become one of the largest producers (if not the largest one) out of the Permian Basin.
On the flip side, ConocoPhillips (COP 0.55%), the world's largest independent exploration and production (E&P) company, unveiled a 10-year savings and operations plan that reflects tighter spending in an effort to increase investor confidence by rewarding shareholders with strong dividends built upon consistent free cash flow. ConocoPhillips lowered its capital expenditure budget to roughly $7 billion per year through 2029. Total cash flow generation is expected to be $50 billion with a 3% annual output growth based on "a real West Texas Intermediate price of $50 per barrel."
In addition to ConocoPhillips, Occidental Petroleum (OXY 0.52%) is also cutting spending in an effort to deleverage its balance sheet after its acquisition of Anadarko. Occidental also estimated that its capital budget will decrease from $9.0 billion in 2019 to somewhere in the $5.3 billion to $5.5 billion range in 2020, which is expected to generate production growth of 2% in the year.
What it all means
Tying it all together, ExxonMobil is raising money from divestments to fund Permian Basin expansion projects aimed at producing hydrocarbons quickly and at a low cost that it can then feed into its immense refinery network. The company's quick return Permian assets aim to pair nicely with its large offshore projects and focus on LNG. Exxon should be able to make these investments while raising its dividend, as it has done for 37 consecutive years. The company has increased its dividend by more than 100% in the past 10 years alone. In sum, Exxon and Chevron could be able to pull ahead from independents like ConocoPhillips and Occidental as spending tightens for E&Ps.
Although the last five years were tough on Exxon, it seems the company has adjusted well to the new energy environment and could have a bright future.
