Investing In Exxon: Who Should You Follow? Buffett Or Boone Pickens

By Ashish Sharma - April 25, 2012 | Tickers: BP, CVX, COP, XOM, RDS-A | 0 Comments

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ExxonMobil (NYSE: XOM) is attracting a lot of investor attention off late. There is a fierce debate going between bulls and bears and the main bone of contention is the outlook for natural gas prices. Exxon has above average leverage to natural gas among major oil companies and natural gas prices can have a significant bearing on the company’s prospects. The following pie charts show Exxon’s exposure to natural gas in terms of developed reserves (figure 1), proven reserves (figure 2) and daily production (figure 3).

Figure 1: ExxonMobil Developed Reserves (Source: 10K filing)

Note: All data in million bbls, Natural Gas Reserves in bcf converted to million barrels using a factor of 6x.

Figure 2: Exxon Mobil Proven Reserves (Source: 10K filing)

Note: All data in million bbls, Natural Gas Reserves in bcf converted to million barrels using a factor of 6x.

Figure 3: Exxon Mobil Daily Production (Source: 10K filing)

Note: All data in thousand barrels, Natural Gas Reserves in mcf converted to thousand barrels using a factor of 6x.

We can clearly see from the figures above that more than 50% of Exxon’s reserves and production volumes are linked to natural gas. Also ~35% of Exxon’s proven natural gas reserves and ~30% of current natural gas production is in US. Hence, natural gas prices in US are particularly important for Exxon Mobil.

Bears argue that the US is seeing a growing natural gas supply glut. Natural gas supplies have increased 42 billion cubic feet (bcf) in the last one year which equates to a 3.5 bcf per month increase on average. US GDP growth is not fast enough to generate a demand which can absorb this supply growth. Also, thanks to advances in technologies which have made extraction of Natural gas cheaper, this glut is expected to continue in the future.

Bulls on the other hand are arguing that Natural gas is currently trading at over an 80% discount from crude oil prices (see figure 4 below). Such a deep discount cannot continue in the long term. Industries traditionally using crude oil and its derivative products will shift to natural gas as their primary energy source if such a deep discount continues. Also, a lot of natural gas rigs will be taken off from drilling if such low natural gas prices continue- thus reducing the supplies. This may take some time though as usually rigs are taken on lease for a relatively longer duration of time.

Figure 4: Natural Gas Discount as Compared to Oil Prices. (Source: Valero Energy Corp. Presentation)

Note: Natural Gas Prices converted to barrels using a factor of 6x.

Leading the bulls is legendary oil investor and businessman T Boone Pickens who recently said that Natural gas prices are near their bottom and will turn up higher from here. T Boone Pickens was holding 94,310 shares of Exxon as of the December quarter end. His vast experience as a successful oil entrepreneur gives him a ground level insight of the industry and he has an excellent track record when it comes to picking oil stocks. On the bearish side is another legendary investor Warren Buffett who completely exited his holding in Exxon Mobil in the December quarter. Although Warren Buffet hasn’t made public his reason for selling Exxon, I believe it was likely because Exxon’s reducing RoCE which got adversely affected by its natural gas acquisitions like XTO Energy.

I am more inclined towards the bullish side on Exxon and would like to go with T Boone Pickens. Here are some of the key reasons for the same:

• T Boone Pickens’ recent performance in the Oil & Gas sector has been much better than that of Buffett. Pickens’ most famous bet recently was buying BP (NYSE: BP  )shares just after the Macando spill when the market was pricing in the doomsday scenario for BP stock. The stock recovered eventually giving T Boone Pickens a good return. On the other hand Buffett made a mistake of buying ConocoPhilips (NYSE: COP) at the height of Oil bubble in 2008.
• The move away from crude and crude derivatives to natural gas is actually taking place at ground level. For eg., Navistar Inc., the leading truck manufacturer, will begin offering natural-gas-powered engines this year across its line of medium and heavy duty trucks. US policymakers are also embracing natural gas. In 2008, T Boone Pickens presented Pickens’ Plan for reducing United States’ dependence on OPEC oil. It seems like US policy makers are now understanding the importance of it.
• Although low natural gas prices in the short term are worrying some investors, it will eventually benefit bigger firms like Exxon as a lot of smaller debt laden natural gas producers will go out of business and Exxon can get their natural gas assets cheap.

Exxon is currently trading at 9.5x forward earnings which is below its historical average. With a strong belief that natural gas prices are near their bottom and will recover from here, I recommend Exxon from a long term perspective. Among other Oil & Gas majors Royal Dutch Shell (NYSE: RDS-A) and Chevron (NYSE: CVX) are also good long term plays on natural gas. Chevron controls over 8 million acres of shale deposits and produces around 5 billion cubic feet of natural gas a day, while Royal Dutch Shell currently owns and operates about 3.5 million acres worth of prime shale assets which contains ~12% of the North American total gas reserves . Both of these companies have made Natural Gas an important part of their future strategy. However, one Oil & Gas major which I would like to avoid based on its natural gas strategy is BP Plc. BP has been selling valuable shale assets to pay its mounting legal bills. Although this helps it in clearing its short term liability, it is not good from the long term perspective.  

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