Whenever you think of ExxonMobil (NYSE: XOM), terms like "biggest oil company" come to mind. Thanks to its recent struggles, though, a more appropriate term might be "worst performing big oil stock".
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Are Exxon's struggles this past year a fluke, or are there deep-rooted problems for the company going forward? Let's take a look at the three threats Exxon investors should watch out for.
1. Putting its fate in the hands of others
For the past few years, Exxon's overall production has been relatively flat. Between 2008 and today, it's grown by a meager 3.9%. While the slight uptick in production is not something to sound the alarm about, it is concerning is that the company is getting more and more of that production from its equity affiliates rather than from its own efforts with the drill.
| Year | % Oil Production from Equity Affiliates | % Natural Gas Production from Equity Affiliates |
| 2008 | 15.1% | 36.3% |
| 2010 | 19.7% | 40.5% |
| 2012 | 22% | 39.5% |
Source: Company 10-Ks
With more and more production coming from equity affiliates, the company is less and less in control of operational decisions that will affect its bottom line. For example, a significant portion of that equity interest is in two major natural gas partnerships in Qatar. In each of these Qatari projects, Exxon has less than a 30% stake and is not the primary operator, meaning they do not have complete operational control. This is in stark contrast to Chevron (CVX 3.88%), which has a majority stake in all four of its largest projects (Gorgon, Wheatstone, Kitimat, and Jack/St. Malo).
Not having complete control of projects can be a major headache. For a recent example, look at the Kashagan project in the Caspian Sea. Exxon and partner Royal Dutch Shell (NYSE: RDS-A) estimate that they'll both be involved in the Kashagan project past 2040 before they start achieving a reasonable rate of return.
If Exxon doesn't produce more of its oil and gas in-house, it may find itself subject to the whims of other companies that may not have its best interests at heart.
2. Getting gassy
Here's something that you need to consider when looking at Exxon or almost any other oil and gas producer: Not all production is created equal. For the most part, oil is the better asset to have. Not only does it have higher margins, but, because oil is easier to transport than natural gas, it is less likely to see regional price discrepancies.
If you look at Exxon's production, you will notice something alarming: More and more of it is coming from natural gas. Between 2008 and 2012, natural gas as a percentage of Exxon's total production grew from 38.7% 48.5%.
| Company | Total Production (in millions of barrels of oil equivalent) | % liquids production |
| Exxon | 4,239 | 51.5% |
| Chevron | 2,610 | 67.5% |
| Shell | 3,170 | 46.9% |
| Total | 2,300 | 53% |
| BP | 2,319 | 50.8% |
Source: Company 10-ks, author calculations
The one consolation for its increased use of natural gas is that a majority of gas production for the integrated majors is oil-indexed gas. For producers, higher prices for oil-indexed gas result in better returns. For a great example of this, look at Exxon's return on capital. From its US upstream operations, Exxon has a 6.3% return on capital employed, versus 31.7% from non-US operations. A large portion of this discrepancy comes from the fact that US natural gas is sold on a spot market independent of oil prices.
Although it would be more comforting if the company focused more on oil projects, as long as Exxon continues to get oil-indexed prices for its natural gas, it's not going to kill the company.
3. Poor execution of major projects
- Kashagan: 7 years late, $30 billion (300%) over budget
- Kearl Oil Sands: 1 year late, $4.1 billion (61%) over budget
- PNG LNG: expected for 2014, $3.3 billion (21%) over budget
Recently, Exxon has not been known to complete projects on schedule, and has consistently spent beyond its original budgets -- spending that translates to lower overall returns. Of course, not every project setback is Exxon's fault. The issues with Kashagan, for example, are well documented, while the majority shareholder in the Kearl oil project is Imperial Oil (NYSEMKT: IMO) (though it's worth mentioning that Exxon owns 69% of Imperial).
Exxon has a few projects in the pipe that could turn things around. The company has plans to more than triple Kearl's current production, and spend big in the Gulf of Mexico over the next couple of years. These oil-heavy projects could help shift its production mix back toward liquids, but whether or not it can achieve its goals on time and within budget remains in doubt.
What a Fool believes
Exxon has had a pretty long list of struggles recently, and many of those issues are reflected in the company's performance over the past year or so. If Exxon hopes to turn things around, it needs to focus on developing projects that will put the company back on the oil side of the business, as several of its current projects are designed to do. It's rare for Exxon to be anything but the leader in this space, but perhaps it's time that it follow someone else's example.
