Exxon Mobil (XOM) has never had it easy in Iraq. Of course, the company has been successful in forging a relationship with the Kurdish Regional Government and has a very successful exploration portfolio there. Ever since Exxon Mobil partnered with the autonomous Kurdistan, the central government in Iraq has felt embittered and spurned. Iraq does not allow companies that forge a relationship with the Kurdish north to explore in the south.
Exxon Mobil was penalized by the Iraqi government for its adventurous stance but the company's earnings, revenue or ratios did not suffer. Instead, they only improved thanks to the security and stability that Kurdistan offers energy companies. Now, Exxon Mobil wants to exit the 8.6 billion barrel West Qurna Phase 1 project. Exxon intends to sell its whole share or part of it so that it can wash its hands off of the Iraqi fiasco. A senior Iraqi oil ministry official confirmed that Exxon Mobil has expressed its interest to pull out of the country's southern oil fields, so that it has more freedom legally or otherwise to operate in Kurdistan.
Exxon Mobil was awarded the West Qurna-1 project in 2009 along with Shell, which is a minority partner. Exxon has not commented about the announcements that the Iraqi minister made nor has it stated that the rumors about selling its stake is true. However, considering media reports and officials at the Iraqi government, Exxon Mobil will sell its stake in the south. It is not clear for how much it is going to sell though.
Kurdistan has always been one of the more preferred destinations for oil companies. Exxon Mobil, Marathon (MRO), Total (TOT) and even Chevron (CVX) have preferred to work with the Kurdistan Regional Government rather than the Iraqi government in Baghdad. There are many reasons for this change in attitude and for taking insurmountable risks. Kurdistan has undiscovered and unexplored oil & natural gas deposits. These deposits are slowly being discovered by foreign companies and no company wants to allow a rival company to get a larger piece of the cake.
Many companies have also begun to understand that Kurdistan offers a safer and more secure environment compared to the hostile working conditions in the South of Iraq. Kurds are very different from other Iraqis and they have always had an idea of being an independent nation. They are just one step away from being an independent country if not for the autonomous status that they enjoy at the moment. Considering the number of companies that have decided to abandon Iraq and move towards Kurdistan, it is interesting to note that Exxon Mobil is not doing anything out of the ordinary.
The decision to sell its stakes in the south is a very wise one and is certainly the result of calculated planning. Iraq is not secure at the moment and has continued friendly relationships with Iran's pariah regime. Moreover, Iraq's government has a favorable opinion of Syria's government and has not really condemned the violence that is being inflicted upon Syrians. If that violence spills over to Iraq or Iran, the oil companies in the region stand to risk billions of dollars. Political analysts and observers have felt that Kurdistan will attempt to break away from Baghdad and declare its independence.
If it chooses to do so, there would not be much armed struggle between Kurdistan and Iraq as Baghdad cannot afford to go through another war. Most likely, Kurdistan Regional Government will attempt to break away from Iraq so that it can take control of its oil business itself without having to pose a risk to oil companies. At the moment, Kurdish oil is transported to the West through Iraqi oil pipelines that run through Turkey. Sometimes, oil is transported in trucks as well, but it has remained an inconvenient option. Exxon Mobil's decision to sell its stakes in the south of Iraq can have political implications and fuel a nationalist sentiment among the Kurds.
Royal Dutch Shell (RDS.A), Exxon's minor partner will probably be left in Iraq all by itself. Shell has major exploration and operation projects in Basra, Southern Iraq. Shell has continued to make profits in the south but has remained hesitant about venturing into Kurdish controlled areas of the north. Chevron, which operated in southern Iraq defied Baghdad and signed an exploration deal in Kurdistan. Chevron decided to sign the deal with Kurdistan because the government shares profits with oil companies unlike Iraqi government, which gives $1 or less for each barrel that is unearthed.
Marathon and Total have significant partnership deals with the Kurdish government. As recently as July, Total acquired a 35% stake two blocks to the north of the Kurdistan capital of Erbil. The French company earned Baghdad's wrath by doing so, and effectively ruined its future in southern Iraq. However, Total's future looks bright in Kurdistan. Marathon has a very successful oil and gas portfolio in Kurdistan and the company effectively washed its hands off clean in the south.
I believe Exxon did the right thing by deciding to sell off its projects in the south of Iraq. Exxon Mobil's numbers are rather impressive at the moment. It currently trades at $87 and has a price to sales ratio of 0.93. With a price to book ratio of 2.39, we can safely say that it compares well with its peers. Exxon's market cap is $398 billion, which shows how big a company it really is. With a profit margin of 10.40% and an operating margin of 11.50%, Exxon is a safe bet to make when it comes to investing. The company's revenue is $426.25 billion and it has a total cash of $13 billion, which I think is enough to assure investors. Exxon's debt is $12.42 billion but it has an impressive operating cash flow of $53 billion and that should take care of its liabilities. Exxon's operations in Kurdistan and its Middle Eastern strategies are well grounded in reality and fiscal obligations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.