Are This Oil & Gas Mega Cap's High Valuation Days Numbered?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world's oil market is about to undergo some radical changes, according to the experts at the International Energy Agency (IEA). The IEA's World Energy Outlook has predicted that the U.S. will become the world's largest oil exporter by 2020, which is just eight years away. How is that going to affect major oil producers such as ExxonMobil (NYSE: XOM)? After all, its current business model is based on hauling in oil from other parts of the globe.
Exxon has already answered part of that question by announcing that it will start selling off the 60% stake it owns in the West Qurna-1 oil field in Iraq starting next month. The Wall Street Journal reported that Exxon Mobil has been willing to share information about its West Qurna-1 holding with potential buyers such as BP (BP) and Lukoil Holdings (NASDAQOTH: LUKOY). Lukoil has been considering moving into the West Qurna-1 oil field. The company plans to make a decision by the end of the year.
Exxon isn't the only major American oil company pulling out of a politically unstable area. ConocoPhillips (NYSE: COP) has decided to sell of its 8.4% stake in the Kashagan oil field in Kazakhstan. Forbes reported that ConocoPhillips might even take a $500 million loss on the Kashagan field in order to make a speedy exit.
This is the beginning of a sea change in oil exploration. Major U.S. oil producers are pulling out of politically unstable Middle Eastern and Central Asian countries because they no longer need to be there. It is now cheaper and easier to drill and pump in more stable places like the U.S. and Russia.
The question investors need to ask is if ExxonMobil is in a position to survive if the oil industry really goes through the major upheaval that the IEA is predicting. Does ExxonMobil have the resources to reposition itself as a major American oil producer rather than an importer? More importantly, can it retain its valuation while going through such a transformation?
ExxonMobil's cash on hand numbers say no. The company's cash and ST investments figure fell from $41.39 billion in March 2008 to $13.26 billion on September 30. Exxon has less cash on hand, partly due to the decline of oil prices. The company has fewer resources at a time when it needs to make major investments in new areas.
The bothersome thing from a valuation standpoint is that Exxon's smaller cash figures coincide with higher revenue figures. The company's revenues have recovered since taking a sharp drop in 2009. On September 30th, for example, Exxon reported revenues of $488.7 billion, a figure that almost matched the high seen in September 2008 of $509.3 billion. Exxon's revenues fell to $305.4 billion in September 2009, just one year after hitting that high.
These figures show that Exxon has increased revenues, but it hasn't been able to hold onto its cash. These figures also show that Exxon's revenues fluctuate dramatically, which explains what happened to a lot of its cash.
Exxon will likely have even less cash for the foreseeable future because of its need to reposition itself. Buying into the new oil fields coming online in North America is going to cost a lot of money. In September, ExxonMobil spent $1.6 billion in cash for two of Denbury Resources' (DNR) oil fields in the Bakken Shale.
The bottom line is that ExxonMobil can no longer retain its high valuation in today's oil industry. These days are numbered. It will have to spend more money to pump less oil to remain competitive. It will also face far more competition because of the number of smaller players in North American oil. Big players like ExxonMobil will have to spend a lot of their cash to buy new assets to stay in the game.
The repositioning in the oil industry means that the days of high valuations for big oil stocks are over. Rising costs and new realities will make it impossible for companies like ExxonMobil to maintain the position and the valuation they once held.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Denbury Resources and ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!