The XOM Mystique

By Peter Pham - May 16, 2012 | Tickers: XOM, RSX | 0 Comments

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In the America of 2012 there are few companies that are as polarizing as ExxonMobil (NYSE: XOM).  Memories of the Valdez spill, the endless wars involving the petroleum trade and XOM’s seemingly unassailable revenue generation infuriate those who hate oil as a fuel source as well as those critics of U.S. foreign policy which seems hell-bent on protecting XOM’s interests at the expense of anyone that stands in the way.

Whether this is a chicken or egg argument is irrelevant.  The truth is likely that it is all of the above.  What is true is that ExxonMobil is the 2^nd largest company in the world that operates in 160 countries around the globe.  A recent interview over at Foreign Policy highlights some of the history of Exxon-Mobil’s method.  It’s a good look at how the oil industry has had to change over the years and what the challenges are going to be for the rest of the 21^st century.

Unlike a number of other companies that dabble in alternative energies to placate the political chattering classes ExxonMobil, for all of its opportunism, is a company focused on one thing, producing oil and gas.

Peak Easy Oil

I don’t subscribe to the Peak Oil argument in terms of production and consumption.  The age of $10 per barrel oil is gone, but that has funded new techniques and new sources previously uneconomic.  Higher prices just change where and how we grab our oil.  For ExxonMobil, who has spurned joint ventures with state oil companies, maintaining their production levels as well as their margins is going to be increasingly difficult and more expensive per BTU produced.   Their recent deal with Russian state oil company, Rosneft (NYSEMKT: RSX) is an example of them having to bow to the reality of the changing oil exploration world.  The initial deal is a $3.2 billion exploration project in the Kara and Black Seas.  To gain access though, they had to trade significant concessions to Neftegaz.

 This is part of the reason why they have had to move to producing more gas and gas liquids than oil.  With the current price ratio per BTU between natural gas and Brent crude around 7.8 having peaked above 10 earlier in the year, the crashing of the price of natural gas harmed their near term earnings but with the acquisition of XTO energy last year they continue to do what they’ve always done, replace their 4.5 million barrel per day production through exploration.  Their very controversial deal with Kurdistan has ExxonMobil on the outs with the Iraqi government and black-listed after apparently telling Secretary of State Hillary Clinton that they were moving forward regardless of U.S. policy in the area.

It is becoming harder for Exxon-Mobil be as able to use their comparative advantages in terms of efficiency and technology to broker deals which bypass the local state oil companies. 

South by South China

While it makes the headlines only sporadically, the tensions in the South China Sea between China, Vietnam and The Philippines is a major issue for the area of the world where the bulk of economic growth will come from for the rest of the century.  North American companies like ExxonMobil, Chevron and Talisman Energy are exploring offshore and China’s not happy about it.  It is said BP stopped their activity in the area for more than a year because of pressure from China and it may have made Conoco-Phillips’ decision to sell their assets that much easier.

Given how much China will need its southern neighbors going forward, it is hard for me to believe that this will devolve into open conflict.  China’s moves to secure an overland route to the west through Myanmar and the Bay of Bengal will likely determine how far they press their ASEAN neighbors.  The Philippines has been the loudest voice to oppose China’s claims, even forcing the issue onto the agenda at the latest ASEAN Summit in Phnom Penh, Cambodia. 

Counter-Cyclical Investment

ExxonMobil’s long held strategy of investing heavily during times when oil prices are down has served them well for a long time.  The XTO acquisition is the latest example of that; coming when oil prices had hit their low around $75 per barrel.  As an investment, ExxonMobil is trading at a multiple of 9 carrying a 2.7% yield.  Margins have been eroding slowly over the past 5 quarters.  Commodity prices are either horribly depressed or the U.S. equity markets are grossly over-valued.  As the situation in Europe reaches a crisis point there will be a coordinated effort to inflate which will re-ignite the strategic commodity markets, like oil, copper, gold and iron ore.  A low beta commodity producer like ExxonMobil is a good defensive play in uncertain times.

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