ExxonMobil: How Long Will The 'Energizer Bunny' Keep Going?
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ExxonMobil (NYSE: XOM) has become the "Energizer Bunny" of energy stocks - it just keeps growing and growing and growing. The company's share price keeps going up and up, even as it announces another big deal that will boost production and revenue seemingly every other day. But how much longer can it maintain this kind of growth?
Debt Keeps Growing and Growing and Growing
Like a lot of companies that are obsessed with growth at any cost, ExxonMobil has taken on a lot of debt in recent years. Its total debt grew at a compounded annual growth rate of 22% from 2008 to 2011. If that was not bad enough, long-term debt grew at a rate of 10% a year in the same period.
The most bothersome figure of all comes from the years 2009 to 2011. Total debt at ExxonMobil increased by 77.3% in just those two years. It grew from $9.6 billion in 2009 to $17 billion in 2011.
This figure is troubling because it means that Exxon's debt is increasing faster than its sales growth and income growth, both of which are pretty impressive. Exxon registered sales growth of 26.9% and income growth of 34.8% in the last year. The company appears to be achieving that growth primarily through increasing its debt.
Exxon's Oil Production and Reserves are Shrinking
So what is going on at Exxon? Why is the company piling up more debt, even as its sales and revenue go up? The answer appears to be that ExxonMobil is in a desperate race to find more oil because it is running out of its core commodity. Exxon's production in 2007 was 2.6 million barrels of oil a day. By 2011, that had fallen to 2.3 million barrels a day, according to Marketline. At the same time, the company's proven reserves fell from 7.7 billion barrels of oil in 2007 to 5.45 billion barrels of oil in 2011.
These figures show why Exxon is going to great lengths to locate new sources of oil - it needs them, and fast. This also explains why Exxon and the Russian state oil company Rosneft are willing to drill for oil in the Kara Sea, an area in Russia where the Soviets dumped large amounts of radioactive materials during the Cold War. The radioactive junk in the area includes an old nuclear submarine and whole nuclear reactors. Experts think that Exxon and Rosneft may end up having to pay to clean up the waste before they start drilling. The cost of such a cleanup is not available.
This also explains why ExxonMobil was willing to pay Denbury Resources (NYSE: DNR) $1.6 billion in cash and $900 million to $1.5 billion in non-cash assets for an oil field and 175,000 undeveloped acres in the Bakken. In addition to the cash, Denbury Resources is acquiring interests in the Webster field in Texas and Hartzog Draw field in Wyoming. Denbury Resources' interests will amount to approximately 3,600 barrels of oil equivalent per day. Meanwhile, Exxon needs to add a lot of production and reserves if it wants to keep up sales of $498.36 billion and preserve a forward P/E of 9.62.
A Future of Debt and More Debt
What that means is ExxonMobil is going to have to take on a lot more debt in the coming years if it wants to keep supplying customers. It will need the debt to conduct more exploration and develop more wells just to keep up its current level of production. Since more of the new wells are going to be in places like the Kara Sea, the production costs are going to be a lot higher. That means more and more of Exxon's revenue is going to end up servicing the debt needed to pay to find more oil.
Obviously, at some point, that's going to start cutting into yield and dividend rate. So enjoy that $2.28 dividend rate and 2.48 yield Exxon is offering you. It will disappear at some point in the not-so-distant future as the debt load increases.
Exxon might be the reverse of a buy and hold play. Conversely, another big oil producer, Chevron (NYSE: CVX), has been hoarding cash with much less debt than Exxon. Chevron is currently holding $21 billion in cash, and investors are wondering whether it is planning an acquisition, or preparing for a rise in oil prices. Chevron currently has a total debt of $9.87 billion, compared to a total debt of $8.87 billion at the end of the first quarter. However, less than one-third of this debt will mature before 2015.
If you currently own shares of Exxon, it might pay to hold them for the next few quarters, but you will have to be prepared to dump them at some point. Sooner or later, all that debt big oil is accumulating just to keep up production is going to come back to haunt it and its investors.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Denbury Resources and ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.If you have questions about this post or the Fool’s blog network, click here for information.