Exxon is punished by Wall Street for using strategy
ExxonMobil plans to increase spending on several oil companies over the next few years, an aggressive gambit to boost oil production and grease profits. However, Wall Street is not so sure that it is a good idea.
It was a busy week for the big oil. Exxon and Chevron launched their 2019 "Investor Day" presentations to prepare their long-term strategic plans aimed at preventing Wall Street and convincing investment countries for the wisdom of their multi-annual spending plans.
There were a few keyword themes that jumped out. First and foremost, both oil reservoirs enter the Permian basin, with both Chevron and Exxon, aiming to produce about 1 million barrels a day from West Texas and New Mexico over the next five years. The Majores ̵[ads1]1; with their hands in everything from offshore production, refining, petrochemicals and LNG – are becoming increasingly slate.
But Exxon went ahead and revealed aggressive plans to spend even more than previously intended to increase oil production. Exxon said it will increase spending by $ 4 billion this year to $ 30 billion. By 2020, spending will rise to $ 33- $ 35 billion and stay within a range of $ 30 to $ 35 billion through 2025. Exxon's management ruled over its plans and claimed that profits and output growth look better than in some cases in newer memory.
The expenditure plans are aimed at higher production in several different areas. The oil cod develops dozens of oil discoveries in offshore Guyana, which can result in 750,000 bpd of production in the mid-2020s. It is starting to develop its offshore area in Brazil. It provided greenlight on a large LNG export terminal on the coast of Texas. And of course it is the Permian. Related: Should we think of nuclear power?
Exxon's size alone means that it must use heavily to prevent production from declining. In fact, the oil supremacy has turned out to be flat in a better part of a decade. "Exxon is so big that it needs to replace many barrels every year. They think with a long-term focus than most." Stewart Glickman, an energy analyst at CFRA, told CNBC.
But the new spending plan is billed as a way to pull that dynamism out. Still, Wall Street was not convinced. Exxon's share price fell more than 2.5 percent immediately after the announcement, even though it recovered some lost ground that day was wearing. The same scenario played out a year ago. When Exxon announced plans to increase production, with the aim of increasing production, the share price fell.
It doesn't help that some of Exxon's peers use their extra cash flow to distinguish higher payouts to shareholders, either in the form of buybacks or dividends. Just a few weeks ago, Chevron announced a $ 25 billion buyback program.
Exxon says the costs will result in higher profits in the future when all new oil and gas comes online. The company says the earnings potential will increase by about 140 percent through 2025. Related: Bloomberg launches alternative to the Green New Deal
It may be logical, but Exxon's prospects and spending plans are diametrically against a scenario where oil demand reaches a peak and goes down. Exxon sees oil consumption rising through 2040, and probably thereafter. It argues that an increasing global population, GDP and emerging middle class in emerging markets will continue to demand. Consumption will increase in transport and petrochemicals. At the same time, fatigue on existing oil fields has strong investments in new supplies.
The skeptical answer to Wall Street suggests that not everyone is as convinced that Exxon's long-life management and oil demand stability. If demand were to peak, say, in 2030 or so, it would question the billions of dollars of investment in projects that have time horizons measured for decades. If the world is still serious about the climate crisis, Exxon's projects can become stranded assets.
It wouldn't even take a drop in consumption to crack some of these projects. A plateau in demand growth, or even a weakening, can offset Exxon's (and oil industry's) aggressive growth plans. And that is precisely why the shareholders increasingly demand payments and penalize large expenses.
By Nick Cunningham from Oilprice.com
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