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Summary

  • Exxon Mobil Corporation's share fell 2.8% to $93.79 after rising around 14% during 2013.
  • The company has planned to cut its capital spending by 6.4% in FY 2014.
  • The recent dip in the company's stock brings the opportunity for investors to jump in and bet on the healthy future prospects of the company.

Exxon Mobil Corporation's (NYSE:XOM) share fell 2.8% to $93.79 after rising around 14% during 2013 as the company disclosed cuts in its capital spending for the coming years during its recent presentation to analysts. The investors seem to be missing some of the favorable aspects of this strategic decision. Therefore, I will discuss some of the positive aspects regarding the decision made by the company.

The company is involved in the exploration, production, and distribution of crude oil and natural gas as well as the manufacture of petroleum products.

First let's have a look at what the company is planning with respect to its capital spending.

Discussion on The Plan

The company has planned to cut its capital spending by 6.4% in FY 2014. The company said that it will spend $39.8 billion on energy projects and other costs in FY 2014, down from $42.5 billion spent in FY 2013. In the future the company will further reduce its capital spending to average less than $37 billion per annum from 2015 to 2017. The thing the investors seem to be missing is that these figures are excluding the money spent made on acquisitions by the company. The chart below shows that the company will actually increase its total capex in FY 2014 in comparison to its capex in FY 2013 excluding capital spending on acquisitions.

Source: XOM 2014 Analyst Meeting

The chart above also shows the changing pattern in the company's planned capex for the coming years. The company will be spending more on its downstream and chemical business lines while reducing the capital expenditure on its upstream business line. I will discuss the rationale behind this alteration in spending for business lines further in my article.

Another crucial concern for investors of a company cutting its capital for the coming years would be the company's growth. Therefore the following heading will discuss where the company's growth will be derived from.

Company will Still Grow

Since investors are concerned about the decline in the company's production and output as a result of this decision I will discuss the impact on the company's production for the coming years.

Production will Still Increase

Despite the planned alteration in capex, the company has projected to record roughly flat production of liquids in FY 2014 in comparison to FY 2013 and 2% growth per year from FY 2015-2017 even if the company does not make any acquisitions. This is because the company is ready and would start production of 10 major projects in FY 2014, a record for the company that will offset the adverse impact of the expired deal in the United Arab Emirates and partial sale of a project in Iraq. Currently the company has outperformed in its production growth per share in comparison to its major competitors as shown in the graph below.

Source: XOM 2014 Analyst Meeting

The company has projected it will produce the equivalent of 4.3 million barrels of oil and gas per day in FY 2017 higher than the 4.0 million it reported for FY 2013 as shown in the diagram below. This is in-line with the industry trend and I will discuss the demand for the products in the following paragraphs.

Source: XOM 2014 Analyst Meeting

Diverging Investment to Higher Growth Areas

The investors seem to be missing the fact that the company will be shrinking its investment in energy products but will be focusing its investment more on its refineries and chemical business. There are forecasts of more balance in the world liquid fuels consumption and production and ample supply of natural gas in the coming years as shown in the following graphs while the chemical market is growing.

Source: EIA, Knoema

The company's chief executive officer Rex Tillerson disclosed that the company planned to spend less on oil and gas production and a little more on its refineries and chemicals plants to capture the opportunities in the U.S. market benefiting from the low-cost feedstock revealed by the shale gas boom.

The following graph presents the forecast of global chemical demand by the year 2020.

Source: XOM 2014 Analyst Meeting

Cheap Feedstock and Shale Gas Boom

The shale gas boom in the U.S. has created investments of about $100 billion in the chemical industry by the companies who aim to construct and expand their shale capacity in the U.S. According to the American Chemistry Council (ACC), the impending U.S. chemical industry investment is related to abundant and cheap natural gas and natural gas liquids from shale formations. These projects could turn to $81 billion per annum in new chemical industry output and 637,000 employment opportunities by 2023. More than half of the investment is by companies from outside of the U.S.

The majority of these investments are being made to expand production capacity for products such as ethylene, ethylene derivatives (i.e. Polyethylene, Polyvinyl chloride, etc.), ammonia, and chlorine. The majority of output is aimed at supply and export markets.

The effect of shale gas on domestic chemical companies has created a reduction in the costs of both raw materials and energy. It is valued that the U.S. chemicals industry investment in ethylene production has improved capacity by 33%. As increased investments to materialize these opportunities come take place the United States could turn into a major, global, low-cost provider of energy. Therefore, Exxon's focus on investing in its chemicals business means it is positioned to take advantage of these factors.

Singapore Rubber Production Expansion

ExxonMobil Chemical has declared it would build facilities to manufacture premium halobutyl rubber and Escorez hydrogenated hydrocarbon resin at its newly expanded petrochemical complex in Singapore. Prerequisites have begun to be fulfilled and construction is anticipated to commence in the second half of FY 2014 and completion expected in FY 2017. Exxon is a key supplier of halobutyl rubber to the global tire industry and this expansion project will increase the production capacity by 140,000 tons per annum. The hydrogenated hydrocarbon resin production unit will be the largest in the world and will be ready to fulfill long-term demand growth for hot-melt adhesives. Also, Singapore is a perfect location to proficiently serve the rapidly growing Asia Pacific market. Since the 1970s, ExxonMobil has been an industry leader in process technologies and capacity expansions of specialty tackifiers and polymers for the adhesives industry. Hydrogenated tackifier demand is projected to double in the next 15 years. Much of the growth is predicted in Asia, where packaging, woodworking and nonwovens manufacturers use hot melt adhesives. According to ExxonMobil's energy outlook, the global number of cars and light trucks is likely to double by 2040 to 1.7 billion vehicles. This will support the growth estimated for halobutyl rubber and the company as well.

Industry Trends and Time to Reap Benefits from Previous Investments

Furthermore, the strategic decision to cut capex is in-line with the industry trend as by vowing to cut its capital spending Exxon joins its peers including Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) and Total SA (NYSE:TOT) who have been reducing their budgets and striving to deliver higher returns on their investments. In recent years, Exxon and other large oil companies have invested the huge amounts of money on exploration and production projects to enhance profitable oil and gas output. Last year Exxon spent $42.5 billion and was regarded as peak spending by Irving, Texas Company. In FY 2014, Exxon is forecasted to bring 10 major projects online, most of them pursuing more profitable crude oil or other liquids including an enormous liquefied natural gas plant in Papua New Guinea and enhanced production from the company's Sakhalin 1 oil and gas enhancement on the far eastern coast of Russia. Mark Albers, Exxon's senior vice president regarded FY 2014 as a big year for the company. The graph below shows how the select projects will add a production capacity of 1 million oil equivalent barrels per day by FY 2017.

(click to enlarge)

Source: XOM 2014 Analyst Meeting

Therefore, the recent dip in the company's stock brings the opportunity for investors to jump in and bet on the healthy future prospects of the company.

Source: Exxon Mobil Corporation: Recent Dip Is An Entry Point