The integrated energy majors are already under intense pressure, as restrained global economic growth keeps a lid on production and an unfavorable refining environment takes a further bite out of profits. Recent earnings have been weak from energy giants, including ExxonMobil (XOM 0.23%), and now a further headwind may surface in the form of poor upstream operations.
A recent research report from analysts with Morgan Stanley shed light on the upstream difficulties facing the company, which may make the future as difficult as the recent past. If their projections materialize, investors may be wise to steer clear of global energy giants such as ExxonMobil, and instead favor smaller, better-performing peers.
Is ExxonMobil a lumbering giant?
According to Morgan Stanley, it appears it is, particularly if you take your cues from upstream operations. ExxonMobil is not expected to produce above-average operating cash flow growth in the future, due to the fact that its upstream portfolio has few significant start-ups. In all, ExxonMobil is expected to produce just 2.6% annual growth in its upstream operations, below the 3.4% growth expected of the sector. Taking a longer-term view, his divergence is only expected to accelerate further, which may materially impact the company's overall results: ExxonMobil is expected to pump out just 1.8% total annual operating cash flow growth between 2016 and 2019, far below the industry average (5.7%).
Moreover, ExxonMobil is projected to have the weakest pipeline of start-ups, and its likely recourse leaves a lot to be desired. To compensate for its sluggish upstream portfolio, analysts speculate the company could make a large acquisition, as it has done in the past. Of course, there's a cost to this strategy, the biggest of which would be a diminished ability to hike its dividend or fund its massive share buybacks going forward.
Two smaller international peer to consider
While Exxon continues to flounder under the weight of poor refining results and now faces an uncertain future due to underperforming upstream operations, Statoil (EQNR 2.77%) and Repsol (REPYY 0.37%) are expected to produce much better upstream operations than their peers, benefiting hugely from more robust start-ups and younger portfolios.
Statoil is set to reap the rewards of having the largest upstream start-up pipeline among the global majors. In addition, increasing operating margins are expected to boost upstream profitability.
As a result, Statoil is expected to produce above-average growth within the sector between 2013 and 2016. Growth in upstream operating cash flows is projected to clock in at 3.8% through 2016, compared to 3.4% for the sector. Longer-term, Statoil's upstream growth is expected to accelerate, which means the company's sector outperformance may widen even further. Between 2016 and 2019, Statoil's upstream portfolio is expected to grow production at a 7.5% annual clip, far outpacing the 2% to 4% production growth expected of the rest of the majors.
Meanwhile, Spain-based Repsol is forecast to perform very strongly going forward, thanks to its young upstream portfolio that contains the lowest portion of fields in decline in the industry. In addition, it holds a high amount of upstream projects in start-up mode, meaning future production is likely to be robust. Analysts expect Repsol's upstream portfolio to produce at a 9.3% compound annual growth rate through 2016, and at a 6.7% CAGR from 2016 to 2019, vastly outperforming the sector average.
With this in mind, investors may be wise to steer clear of ExxonMobil in what amounts to a very tough operating climate for the industry juggernaut. Statoil and Repsol are executing better, and according to analysts, have smoother paths ahead of them thanks to their far stronger upstream portfolios. While it's difficult to say with certainty that ExxonMobil should outright be avoided, there are nevertheless clear bumps in the road that investors would be wise to keep in mind.
