ExxonMobil (XOM +0.17%) is one of the largest oil and natural gas companies in the world. It has long been hailed as an industry leader, particularly when it comes to execution. When it comes to more traditional wells, the company's skill has been built over time. It's starting to build its skills and differentiate itself in the onshore U.S. energy market.
Exxon has high returns on capital employed
Exxon is currently at the top of the heap when it comes to return on capital employed (ROCE). This is a metric that basically looks at how well a company is using shareholders' money. As the chart below shows, Exxon's ROCE is nearly 25% today. The next-closest direct peer is just shy of 21%.
XOM Return on Capital Employed Data by YCharts.
That's a testament to the operational excellence on which Exxon has long focused. To be fair, it isn't always the top performer on ROCE. A decade ago, the energy giant was exactly where it is today, with a higher ROCE than its peers. Then ROCE fell to the middle of the pack and, for a brief spell during the pandemic-led energy downturn, it was near the bottom. This figure tends to wax and wane along with the business to some degree.
For example, Exxon entered the 2020s with a weak outlook for production growth and, thus, was forced to spend more money than its peers to support its production levels. That was a trouble spot when the energy sector was whacked by the economic shutdowns used to slow the spread of the coronavirus. As the company's spending began to bear fruit and energy prices rebounded, ROCE improved. But there's also another element here that can't be ignored. Often, it takes time and money to build a knowledge base so you can, ultimately, outperform. That's on display today in the Permian basin.
Exxon goes from underdog to top dog
In 2021, Exxon was drilling shorter wells than many of the biggest onshore U.S. drillers. Longer wells tend to produce more oil and greater profits. So, a goal was to not only catch up to peers but to beat them. And that's exactly what Exxon has done. Today, it has more long wells than the same peer group.
Another big factor is the length of time it takes to drill a well. Perhaps it is somewhat obvious, but the quicker you can drill a well, the sooner you start producing oil and, more importantly, revenue from that well. In 2019, Exxon's drilling times in the Permian basin were longer than its U.S. onshore peer set. Now, it drills wells faster than any of its peers.
NYSE: XOM
Key Data Points
Then there's the oil produced in the first 180 days of production. More oil is better. In 2020, Exxon's production from a new well was at the low end of the peer set. Today, it is toward the high side. That said, there's an interesting shift here because the peer group's production in the first 180 days has plunged while Exxon's has gone up. This suggests that other companies focused on picking the low-hanging fruit, and now they are dealing with less-desirable well sites. Exxon, on the other hand, is using its knowledge to improve its performance.
Investors should be pleased
The easy takeaway here is that Exxon has become a major force in the Permian as it has built up its skill base. The bigger takeaway is that Exxon is, once again, using top-tier execution to lead the energy industry. Sometimes, that takes a few years of experimentation with technology to achieve. But somehow, Exxon seems to find a way to do it again and again. If you own Exxon, you should be happy to see that execution is still one of the company's key strengths.
