For over 100 years, the companies of the former Standard Oil Trust have been the standard bearers of the American oil industry. ExxonMobil (NYSE:XOM), the largest remaining member of the Standard family of businesses and the largest company on the American exchanges, is as much a part of American history as any company out there. But the recent tensions between Russia and the U.S. has some questioning whether ExxonMobil's relationship with Russian company Rosneft can continue if increasing sanctions were applied to it. Perhaps the better question would be, if Exxon were forced to choose between cooperating with Russian companies and its American operations, which one would it choose?
At first, the very idea sounds absolutely ludicrous. If you look at ExxonMobil's portfolio, though, the answer may not be as simple as you might think. Let's take a deeper look at ExxonMobil's assets to see why choosing between operating in America and overseas may not be as much of a slam dunk as we originally thought.
The international symbol of American energy is less American than you think
The downing of the Malaysian Airlines flight is another tragic example of the recent tensions between Russia and the West, mostly over Ukraine. This has led President Obama to enforce even tighter sanctions on two major Russian oil and gas companies: Rosneft and Novatek. According to the administration, these sanctions are made in a way that they will hurt these Russian companies, but they will minimize harm on Western companies. Here's the problem with that. Between all of the joint ventures and equity stakes that Western companies have in Russia, it is near impossible to impose sanctions on the Rosnefts and Novateks of the world without harming Western firms.
This is where it gets a little tricky for international oil companies like ExxonMobil, the United States has slowly become a smaller and smaller part of the business for decades, and its by far the least profitable part of the company. For Exxon and just about all members of big oil, it's all about the upstream side of the business. In the case of ExxonMobil, though, it's actually all about the non-U.S. side of the upstream business.
Oil and gas production from outside the United States accounts for almost 70% of the company's earnings and has a return on capital employed of 24.3%, compared to the US production side of the business that only accounts for 12% of earnings and has a paltry 7% ROCE. The argument could be made that ExxonMobil's downstream and chemical operations in the U.S. have the highest returns in the company, but they are a small part of the total earnings stream and they only boost the U.S. segment's ROCE to 10.9%.
|Exxonmobil Business Segment||Total Earnings (FY 2013, in millions and % of total)||Return on Capital Employed (FY 2013)|
|U.S. Upstream Only||$4,191 (12.8%)||7%|
|International Upstream Only||$22,650 (69.6%)||24.3%|
|Total U.S. Operations||$9,145 (23%)||10.9%|
|Total International Operations||$24,973 (77%)||19.4%|
If we look further into the future, it appears that ExxonMobil will continue to decrease its exposure to U.S. operations. Eight of the major projects that will come to completion within the next couple of years all are outside the United States, and only 7.8% of the undeveloped acreage in ExxonMobil's portfolio is in the United States. In fact, the 11 million net acres in the Rosneft Arctic joint venture is more than double the undeveloped acreage held in the United States. This joint venture alone, expected to cost $500 billion, has enough oil that preliminary estimates believe that it could single-handedly triple ExxonMobil's proved reserves.
What a Fool believes
There have been several calls from the media that U.S. companies should pull out of Russia because of what has happened recently. But for ExxonMobil, losing operations in Russia could actually have a much larger impact on the future of the company than losing its American business segment. Considering this, it's a little easier to understand why on the first day of these new sanctions ExxonMobil mobilized its first offshore rig to the Russian Arctic for the summer exploration season and why it seems to be continuing on business as usual despite these sanctions.
Investors in ExxonMobil should really pay attention to these sanctions, because if the U.S. were to ratchet sanctions up even further, then it could have a extremely profound impact on the future of ExxonMobil. I'm not saying that Exxon would close up shop in the U.S. if it had to choose between the two places, but management will have to seriously mull it over.