ExxonMobil (NYSE:XOM) weighed in recently with its annual Outlook for Energy. With crude prices continuing to inch their way northward, it seems that some takeaways from company's newest outlook, along with some thoughts on the ExxonMobil itself, might be of value to Foolish investors.
Exxon's prognostications for energy are not materially different from those issued in June by the U.S. International Energy Agency. But while there is reasonable agreement between the two forecasts, a consideration of both has only heightened my notion that energy will remain an active investment area for about as far as the eye can see.
In the world of energy, expectations of a status quo in demand and production still provide lots of work for service companies such as Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI), and BJ Services (NYSE:BJS), along with exploration and production companies ExxonMobil, ConocoPhillips (NYSE:COP), and others. That's simply because both oil and gas wells lose pressure over time and the ability to produce at prior levels, which necessitates remedial steps to revitalize production, along with the drilling of additional wells to compensate for the declines.
Beyond the status quo
Looking ahead to 2030, however, Exxon believes that we'll hardly be in a status quo situation. Rather, the company thinks that growth in energy demand resulting from increases in population and economic output will necessitate a more than 60% hike in energy production in the next two-and-a-half decades. According to the company's analysis, fully 80% of the increase in demand will come from developing nations. And a potentially even higher increase in demand will, Exxon believes, be offset by more efficient uses of energy. Indeed, as the company noted in releasing its forecast, If the world were to remain at 2005 energy intensity levels, global demand by 2030 could be 40% higher than our current outlook.
ExxonMobil's forecast does, however, anticipate a status quo in the relative portion of demand satisfied by fossil fuels. According to the company, the current figure of 80% of the world's energy demand being satisfied by fossil fuels is likely to remain unchanged by 2030. More specifically, the global demand for oil and other liquids is expected to climb by 1.4% each year, with the aforementioned efficiency gains tempering demand growth somewhat. At the same time, Exxon believes that natural gas will be the fastest growing major energy source, with about a 1.7% annual increase in usage, while coal usage will grow nearly as rapidly, or about 1.6% per year.
The company also anticipates that a substantial increase in the numbers of light-duty vehicles -- basically cars and SUVs -- will drive a significant portion of the demand increase. And as is the case with overall demand growth, much of that expected vehicle increase probably will emanate from the developing nations, where fleet growth is expected to average 5% per year, versus a 2.1% worldwide rate.
Exxon uses its own circumstances to describe the increasing importance of technological advancements in making possible many of the world's largest exploration and production projects. As the forecast notes, Advanced deepwater technology is highlighted in our Kizomba A project off the coast of Angola in West Africa, where production is taking place in 4,000 feet of water. At our Sakhalin Island project in eastern Russia, under extremely challenging and remote Arctic conditions, advanced drilling technology is enabling development of resources located 6 miles offshore from the onshore drilling facility.
By now, I think I hear Fools everywhere inquiring about what all this portends for the world of investing. From my perspective, it simply indicates that energy companies -- especially those with worldwide operations -- will have an underpinning of demand that will drive their activity levels meaningfully in the years ahead. And since we already have ExxonMobil in our sights, and have discussed briefly its take on the relatively long-term future of global energy demand -- along with having noted a couple of its more technically challenging global development projects -- let's shift our gaze to include somewhat more detail on ExxonMobil itself, especially as it operates in a world defined by its own energy demand prophecy.
The law of large numbers
The numbers at ExxonMobil are big -- very big. For instance, at the end of 2005, the company had 115 million gross undeveloped exploration acres in 33 countries. With an acreage position of this magnitude, coupled with a considered approach to development and reserve acquisitions, the company was able to add 4.4 billion oil-equivalent barrels to its resource base last year. Its development portfolio includes more than 110 projects, representing a potential net investment (net investment refers ExxonMobil's share alone, exclusive of those of its partners) of more than $120 billion.
Much of the company's increasing level of upstream spending -- here I'm referring to expenditures made closer to the extraction site, rather than those made, say, on refineries or marketing facilities -- will occur in more technologically challenging environments and frequently will involve tight gas, heavy oil, acid or sour gas, Arctic conditions, deep water, or liquefied natural gas. As development horizons necessary to produce meaningful levels of hydrocarbons become more and more technologically challenging, those companies with the deepest pockets clearly will have an edge in the race to achieve higher production levels and progressively stronger financial performance.
On the chemicals side, ExxonMobil's huge operation makes it the world's largest producer of paraxylene, a rapidly growing petrochemical used in fibers and bottles, and benzene, which is used in the manufacture of nylon and polystyrene. The vast majority of its chemical capacity is operated in conjunction with large integrated refining complexes and gas processing plants. This sort of integration materially improves the operating efficiencies of the facilities.
As we continue along with our large numbers, it's noteworthy that ExxonMobil total revenue reached nearly $371 billion in 2005. Analysts anticipate that by next year it could tickle $400 billion, all on the way to a forecasted earnings-per-share consensus of $6.23 in 2007. And with a market capitalization of $445 billion, this company is at the top of the megacap category.
ExxonMobil's five-year PEG ratio (the P/E ratio divided by the company's anticipated growth rate) is 1.32, not bad for a giant among giants. Its enterprise value (essentially all the debt and equity it has taken to fund the company less the cash on the balance sheet) divided by EBITDA (earnings before interest, taxes, depreciation, and amortization) is a more than acceptable 5.2. Its return on equity over the past 12 months is an impressive 35%.
But mostly I like the idea of Foolish portfolios including ExxonMobil for the combination of the company's size supremacy in the exploration and production sector, its ability to fund major technologically advanced projects, a global reach that makes it something of international play, the ability that its sheer size provides for it to weather short-term commodities price fluctuation, and its figurative position at the top of what I believe will continue to be an important sector in the years ahead. I also like the idea of Fools starting off with a dividend yield of 1.7%.
For related Foolishness:
- International Superstar Stocks: Energy
- An Energy Services Starter Kit
- Schlumberger: Punished for Performance
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Fool contributor David Lee Smith owns shares in Schlumberger. He welcomes your questions or comments. The Fool has a disclosure policy.
