Exxon Mobil Now A Stronger Stock On Angola Operations
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When we speak about dining in some of the most expensive restaurants in the world, purchasing clothes at luxury outlets, sipping on champagne that is probably unaffordable to most upper-middle class Americans and staying in budget hotel rooms that cost a minimum of $300 per night, one may assume the city to be either Tokyo or Paris. But life in the world's most expensive city Luanda is similar to what I just described in the first sentence. After decades of struggle, civil wars and colonization, Angola seems to be experiencing its own little success story. The wealth is garishly visible in the capital city where restaurants and cafes compete with each other to present menus that are eye-watering even to the most spoiled expatriots. All this observable wealth can be attributed to the burgeoning oil and gas industry, which has attracted investments from oil majors like Exxon Mobil (NYSE: XOM).
Angola might seem like a success story in the beginning but the fact that it has so many problems suggests something otherwise. On a closer look one can surmise that not everything in Angola is rosy. Income and wealth disparity is very high and most Angolans live in abject poverty. The wealth is concentrated in the upper echelons of the society, and most wealthy people in Angola have some connections with either the ruling elite or with influential businessmen. The wealth that is generated from foreign oil companies does not reach common Angolans and is unfortunately funneled back to the rich. The often repeated and disliked phrase "the rich get richer and the poor get poorer" holds true in this country at least. Corruption, red tape and bizarre import laws make even a box of chocolates more expensive than gold. This is one of the reasons why expatriots find Angola extremely expensive.
Angola has gone ahead of Nigeria to become the largest crude oil producing nation in Africa. Oil is so important to Angola that almost 80% of its GDP and more than 90% of its export revenues depend upon oil production. Angola's 2004 Petroleum Act is relatively friendly to foreign companies and encourages them to invest in infrastructure and oil exploration. Sonangol Holding has the exclusive authority to both onshore and offshore exploration and production activities in Angola. Companies like Exxon Mobil are particularly interested in Angola because of the country's lenient rules with respect to licenses.
But I do believe that oil and natural gas companies have a lot of responsibility in changing a country's future. For instance, Exxon Mobil has helped generate jobs in Angola that has helped people directly and indirectly. The Xikomba and Kizomba A, B and C projects have been crucial in shaping this African country's economic progress and that progress has had a snowball effect on Exxon Mobil's profits. The more oil it has discovered in Angola, the more Angolans have been given employment.
Exxon Mobil's affiliate Esso Exploration Angola limited has discovered more than 38 areas from where 13 billion barrels can easily be recovered. The astonishing pace at which Exxon has discovered new oil fields has led to a spurt in construction and development. Construction and infrastructure development have allowed thousands of jobs to be generated, both temporary and permanent. With a proven track record of hiring local workers as long as it is possible, Exxon Mobil has helped thousands of Angolans to enjoy the resources of their nation without being exploited by their fellow countrymen. Exxon Mobil generated $4 billion worth of work to an estimated 3,500 workers.
The Kizomba Satellites Phase 1 project was kick-started last week, and analysts expect 100,000 barrel from this oil field alone. With an operating cash flow of $57 billion and a free cash flow of $22 billion, Exxon Mobil's finances are very impressive. Part of this financial success can be attributed to the company's local employment policies. It also had a net income of $41.06 billion at the end of 2011. At the end of 2011, Exxon had a net profit margin of 8.68%. In June 2012, the company displayed 13.86% profit margin, which is very impressive. Even the operating margin at the end of Q2 was 20.56%, whereas at the end of 2011 it was only 15.06%. Exxon Mobil also has an impressive carbon disclosure rating of 70/100, which is of significance when we talk about a country like Angola. The total debt at the end of 2011 was $17 billion, which is quite a huge number. However, considering the dramatic increase in the profit margin, one can expect Exxon's dent to reduce by the end of this year.
Exxon's only American competitor in Angola is Chevron (NYSE: CVX), which is doing well in that country as well. Chevron holds a 36.4% stake in Angola LNG, currently the largest stake in the country. Chevron expects its first shipment from its 5.2 million metric ton plan, located in Soyo, sometime this year. BP (NYSE: BP), Total (TOT) and Eni (E) hold stakes of 13.6% each. Though BP is doing well in Angola, its business abroad has been marred by oil spills and accidents. One of the worst spills in history happened off the coast of Angola, and BP's Gulf of Mexico disaster is still fresh in our memories. BP currently has access to nine major blocks off the coast of Angola. Total and Eni hold smaller shares of the oil market, which helps Exxon Mobil to monopolize Angola's oil fields.
If Exxon Mobil continues to help average Angolans to receive vocational training and employment, it would not only help the Angolan society to progress but also reduce the rich-poor divide that we see today in Luanda. Moreover, infrastructure development, construction and job creation are always positive factors and bolster a company's international and local image. I do believe Exxon Mobil has the ability to not only make profits in Angola, but also make sure that a part of that wealth reaches the people of Angola instead of funneling more wealth into the pockets of its filthy rich ruling class. I think this will have a very positive affect on its stock in the coming quarters.
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