2 Legal Battle Updates In The Oil & Gas Sector
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Now is a great time to examine the recent developments in the legal problems for ExxonMobil (NYSE: XOM) and the implications for the company. Specifically, I will discuss the company's legal problems in the states of Maryland and New Hampshire. I will also examine the company's transformation from producing natural gas to producing more oil and liquids.
The highest court in Maryland has overturned jury verdicts requiring ExxonMobil to pay in excess of $1.5 billion in damages after a leak from a gas station polluted a community's drinking water in 2006. The Court of Appeals of Maryland has issued two rulings recently, ordering new trials in cases related to the incident. The larger case was brought by 150 families and businesses and, in 2011, a jury awarded $1 billion in punitive damages and $495 million in compensatory damages. The higher court has overturned the punitive damages on the grounds that they could only be awarded if the plaintiffs proved that the company had intended to act wrongfully, and this was not the case.
Meanwhile, Exxon has begun its defense against a claim from the state of New Hampshire that it should pay millions of dollars spent by the state to clean up groundwater that was contaminated because of MTBE. The state has claimed that MTBE (methyl tertiary butyl ether) is a defective product because of its ability to travel farther and faster and contaminate larger quantities of water compared to gasoline without additives. The state is seeking more than $700 million to test 250,000 private wells and clean up approximately 5,600 contaminated sites. Exxon is the only defendant that has not settled with the state on the grounds that MTBE did what it was supposed to by replacing lead in gasoline and reducing emissions in compliance with the 1990 Clean Air Act. New Hampshire is the only state that has reached the trial stage in a lawsuit over MTBE.
The transformation from gas to oil
Exxon has added an additional 1.8 billion barrels of oil equivalents (BOE) to its proven oil and gas reserves in 2012, of which 1.4 billion consisted of crude and other liquids. This increases Exxon's total proven reserves to 25.2 billion boe at the end of 2012, up from 24.9 billion boe as of the end of December 2011.
Exxon has sensibly and strategically shifted weightage away from natural gas towards liquids by buying a number of quality assets at low prices. In 2011, its total reserves were made up of 51% natural gas and 49% liquids, but, by the end of 2012, this reversed to 49% natural gas and 51% liquids. The 2012 liquid additions make for a 174% reserve replacement ratio (RRR) for crude and other liquids in 2012, and only 56% for natural gas. Over the past few years, however, crude and other liquids' replacement ratio for Exxon has been 102%, while adding natural gas reserves 45% faster than it produced.
Exxon has shown a decline in upstream performance and abroad as a result of pulling back from riskier overseas operations and focusing more on revenue stream diversification. It has altered its revenue structure significantly, earning 74% of its revenue from drilling, instead of 90%. Refining accounted for just 4.3% of sales in 2011 and now accounts for just under 17%. Because of the domestic supply situation of oil and natural gas, Exxon has concentrated on gaining more from downstream and chemical production.
Total (NYSE: TOT) is a French oil major with operations in both the upstream and downstream sector globally. The company generates about 85% of its revenues from its upstream activities. Total has not grown as much as its rivals, and has increased its earnings per share (EPS) only 7% since 2005. However, it has increased its dividend by 45% since 2005, though it has stopped repurchasing its shares with effect from 2006.
Total has a strong balance sheet with a low level of net debt that amounts to about 400% of its annual earnings. It has replaced only 93% of its reserves in 2012, compared to Exxon and Chevron, which replaced 119% and 112%, respectively. Total has 13 years of proved reserve life and is setting out to increase its daily production from 2.4 to 3 million barrels/day over the next five years. The company has already started on the development of the projects that will drive growth until 2015 and 90% of the projects until 2017, and it is extremely likely that the company will accomplish its goal of production growth. Total has a low P/E ratio (around 7 times) and a high dividend yield of around 6%. However, there are better stocks to own in this sector. I recommending holding onto shares of Total, but I would avoid buying additional shares at this time.
Denbury Resources (NYSE: DNR) is approaching the production of oil differently from most other companies in the business, and this results in an environmentally-friendly business practice. Denbury, located in Dallas, Texas, produces oil using a process that captures carbon dioxide, which is subsequently injected at high pressure into old wells that would be considered useless. This means that an important greenhouse gas company is used fruitfully, along with the production of considerable amounts of oil that otherwise would not be produced.
The process is known as carbon dioxide enhanced oil recovery (CO2 EOR), and also as “tertiary recovery." Once hydrocarbons have been produced through the EOR process, the carbon dioxide is separated at an on-site recycling center and then used for the production process. The carbon dioxide used in its operations is obtained from several areas, including the Rocky Mountains. The company reported adjusted fourth-quarter 2012 earnings of $0.36 per share, which was comfortably ahead of the analysts' consensus forecast of $0.29. On a year-over-year basis, the company's adjusted EPS figure was less than the $0.45 per share in the same quarter of the previous year because of lower price realizations. I recommend watching this stock carefully and being prepared to buy on more favorable developments.
Because of its size, Exxon should be easily able to handle any liabilities arising out of its legal problems. Its transition to oil and liquids, even when it is the largest natural gas producer, means that future growth should be impressive. On the basis of this anticipated growth, investors should take a closer look at ExxonMobil and consider buying the stock.
StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). The Motley Fool owns shares of Denbury Resources. 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!