In mid-March, the world's largest listed oil company, ExxonMobil (XOM 0.12%), launched a $5.5 billion bond offering. For most companies, tapping the debt market for extra working capital would not be such an issue. However, this is the first time that Exxon has tapped the corporate bond market for cash in two decades, which underlines the cash flow issues oil and gas majors are currently having to grapple with.
Still, this bond offering hardly does anything to tarnish Exxon's highly impressive balance sheet. At the end of 2013, it had net debt of $18 billion, a gearing ratio of 10% -- the new debt issue will push gearing up to 14%. Further, it is paying almost nothing to borrow this extra cash. The debt offer is broken down into five lots, the smallest of which pays interest of 0.24% and the largest of which pays 3.2% -- after factoring in inflation, these interest rates become negative in real terms.
Nevertheless, Exxon's first dash for cash in two decades highlights the cash crunch the company is having to deal with. It reported record capital expenditures of $42.5 billion during 2013, a figure only just covered by cash generated from operations of $45 billion. Unfortunately, it had hardly any cash left over for dividend or share repurchase commitments, which totaled $28 billion during the year.
With cash flows dwindling, Exxon's management plan to bring a record 10 new projects this year, adding production of 300,000 barrels of oil equivalent per day. Additionally, it has cut capital spending for 2014 to $40 billion, which is then expected to average $37 billion per year during 2015 to 2017.
What's more, Exxon should see a significant boost to earnings from the long awaited start-up of the Kashagan oil field later this year. The Kashagan field is the largest oil discovery in 40 years, and the project to develop the field has required so much investment and expertise that a consortium of oil majors has been required to develop it. The consortium includes Exxon, Royal Dutch Shell (RDS.B), Italy's Eni (E -1.57%), and France's Total (TTE -2.38%).
Size and complexity
Kashagan is not just one of the world's largest oil fields, but it has also turned into one of the most complex and expensive oil projects ever. From an initial cost estimate of $57 billion for the life of the project, its development is now expected to cost a staggering $136 billion over its lifetime -- that's 138% more than originally planned.
Kashagan is no simple find-drill-and-produce well. No, the Kashagan field is located within Kazakhstan's zone of the Caspian Sea, meaning that to avoid damage from pack ice in a shallow sea, which freezes for five months of the year, much of the project's infrastructure had to be built on artificial islands. As a result, the project required the construction of a landmass to ensure its long-term survival.
Things were progressing to plan, albeit slightly behind schedule and over-budget as of last September when, finally, the project started up -- but then disaster struck, as a gas leak forced production to stop. To all involved, this was a huge surprise since Kashagan, as you can imagine, has been constructed using the most cutting-edge technologies throughout.
Tests have been made on the pipeline and surrounding environment and results are expected during the next month or so, which should give engineers the data they need to fix the problem and recommence production. To help, precautions have been taken and replacement pipes have been ordered in order to cope with various scenarios, so once engineers know what the problem is, it can be fixed without delay.
In the end, it should be worth it
All in all, despite these delays and troubles, Kashagan is a project worth chasing and, once online, it will add a significant boost to the bottom lines of all involved. For them, sustained production from the field will mean a much-needed boost to cash flows, which have come under pressure during the past few years. In particular, the Kashagan oil field is expected to contain 38 billion barrels of oil. So, if oil continues to trade around $100 per barrel, the project, over its lifetime, could yield revenues of $3.8 trillion -- need I say more? (Exxon and Shell each have just under a 17% stake in the project, amounting to almost $650 billion in revenues each over the life of the project.)
Exxon's dash for cash is nothing to worry about and at such low interest rates the company is almost borrowing the money for free. In addition, it has plenty of new projects coming online during the next two years, which should boost cash flows.