ExxonMobil (NYSE:XOM) does its best to be a calming force in the volatile world of oil and gas production. While many companies try to ride the waves of rising and falling oil prices, ExxonMobil focuses on doing the same things year in and year out so it doesn't get burned by oil price swings.
Not all investors are used to this steady-as-she-goes approach, and it leads to many people misunderstanding ExxonMobil's value proposition. To help you better understand what this oil giant brings to the table, here are five charts and quotes that show what the C-suite at ExxonMobil wants you to know.
Plenty of oil to go around
Remember a few years ago when everyone -- including the CEO of Russian natural gas company Gazprom of all people -- was complaining that oil prices were headed through the roof and that peak oil was upon us? Yeah, I can't, either. There is still lots of oil left around the world, and ExxonMobil has loads remaining to produce.
Today the company has about 90 billion barrels of estimated recoverable resources; based on its current production rate of 4 million barrels per day, that is more than half a century worth of available production left. So while there might be short-term scares or another media frenzy that oil production is entering its decline, ExxonMobil will likely remain in business for as long as it has already existed as a company (more than 100 years).
Spending a lot of money lately, but that's a good thing long term
"I think one of the other things to keep in mind when you look at upstream ROCE [return on capital employed] over the last few years, particularly in our case, and I can't speak for others. But one of the aspects of these very large legacy plateau-volume, non declining-volume projects, however you want to call them, is all the [capital expenditure] is up front." --David S. Rosenthal - Vice President of Investor Relations and Secretary
A major gripe from investors in ExxonMobil -- and other integrated oil and gas companies -- is that these companies have spent tens of billions of dollars on certain exploration and development projects, and since they are not yet producing they have hurt the company's returns. However, many of these projects require significant capital to get off the ground, but when they are up and running the costs are considerably lower than conventional oil and gas drilling.
Let's use oil sands extraction as an example. This type of oil production requires many facilities and significant infrastructure to unlock the oil from the bituminous sands. However, once these facilities are in place, the extraction costs per barrel are considerably less than conventional projects, which drives positive cash flow for many years. Here is an example of the expected cash flow from an oil sands project versus other types of oil production
Once these high up-front capital projects come online, ExxonMobil's returns on capital employed should improve and hopefully get back to a greater than 20% return within the next couple years.
Generating value with flat earnings
"We will continue to pay a very consistent and increasing dividend over time, and I think you've certainly seen evidence of that over the last few years. And after you accomplish those two things, the rest of the cash flow will flow back to the shareholder through the share buyback program." --David S. Rosenthal - Vice President of Investor Relations and Secretary
As a company, ExxonMobil is pretty self-aware of what it is and what value it provides to shareholders. Given its sheer size and scale, the company can't consistently bring on annual production growth in the double-digits. Instead, it needs to generate value for shareholders with modest growth and not count on the price of oil to fuel the stock price.
To drive value for investors, ExxonMobil must focus on generating loads of excess cash it can give back to shareholders in the form of a strong, ever-increasing dividend, as well as buying back shares with anything left over. This has worked extremely well for its shareholders. Since 1999, management has repurchased close to 40% of all shares outstanding -- even including the issuance that was part of the XTO Energy purchase in 2010 -- which increases earnings per share. To give you an idea of the power of these buybacks, look at the difference in earnings and earnings-per-share growth between 2010 and 2013
|Exxon's earnings and share history||2010||2013||% Change|
|Earnings||$30.46 billion||$32.58 billion||6.9%|
|Share count||4.855 billion||4.419 billion||(8.9%)|
|Normalized earnings per share||$6.57||$7.97||21.1%|
While the company's overall earnings growth might not overwhelm you, it can still generate strong returns for investors through its close to 3% dividend yield and its ability to buy back loads of shares.
Think we haven't been big in the shale boom? Just wait
"...we are just now beginning to scratch the unconventional plays and getting some of those wells down and see what we've got going on." --David S. Rosenthal - Vice President of Investor Relations and Secretary
Much attention has been given to the fact that ExxonMobil and other Big Oil members have not been as successful as many smaller, independent exploration and production companies at developing shale oil and gas plays in North America. By most accounts, ExxonMobil's acquisition of XTO Energy hasn't panned out like many would have hoped, as production and returns on shale wells have so far not been up to ExxonMobil's standards.
One thing to keep in context with the perceived weakness in North American shale is that the Big Oil companies haven't drilled much or brought on a ton of production. This doesn't mean they won't do so in the future. Instead of going full bore on shale, ExxonMobil has taken a much more measured approach so that when it does drill for shale, it sees the types of returns the company expects from its projects.
ExxonMobil has accumulated over 1.5 million acres in what could turn out to be America's most important shale formation: the Permian Basin. The company has the luxury to wait to drill those wells (unlike the independents) because ExxonMobil owns the land, so it doesn't pay royalties or lease obligations to third parties. Just because ExxonMobil hasn't been going gangbusters in the U.S., that doesn't mean you should write it off yet.
We're not letting go of Russia that easy
OK, so that isn't a quote from management or a company presentation slide, but ExxonMobil's response to growing Western sanctions against Russia (over its activities in Ukraine) illustrates clearly that the company intends to be active in the exploration and development of oil and gas projects there.
The best example of this was recent activity in the Arctic by ExxonMobil and Russian partner Rosneft. ExxonMobil asked for a two-week extension on compliance with new U.S. and European Union sanctions so it could properly and safely shut in some wells it had drilled in the Arctic. However, during that shut-in grace period, both companies found the time to drill and discover a new oil and gas field with as much as 2.5 billion barrels of oil equivalent. That is rather convenient timing for this discovery, just before most Arctic exploration needs to pull out for the winter, giving both companies plenty of time to put together a development plan and hopefully let tensions between Russia and the West die down.
What a Fool believes
If you're looking for the next big thing in the coming year or so, you are definitely barking up the wrong tree if you are looking at ExxonMobil. That doesn't mean you should ignore it, though. Few companies have generated value over the long term as well as ExxonMobil. As long as the world needs oil -- and it probably will for the next few decades -- ExxonMobil will continue to build wealth for investors over time.