Exxon Mobil Corporation (NYSE:XOM) is presently re-strategizing its business, expanding existing facilities, and making new business contracts. The company has recently raised its debt after a pause of about 20 years to fuel the financing of these activities. Let us see where the company stands relative to its industry and where the company is headed in the foreseeable future.
Revenue Distribution and Capex
Exxon is a global large cap organization involved in the exploration, production and distribution of crude oil, natural gas and petroleum products. With its various divisions and affiliates the company has established operations in several countries around the globe; international operations make up approximately 64% of the revenue base of the company, while the remaining revenue is attributable to the USA.
With regards to the functional segments of the company, Exxon's revenues are distributed among three major segments: upstream, downstream, and chemicals. A major chunk of earnings are contributed by the company's upstream operations.
Exxon is slashing its annual capex by approximately 6% this year from $42.5 billion last year to just $39.8 billion this year. However, a larger chunk of that expenditure will be invested in the downstream and chemical segments as opposed to the upstream segment. Opportunities opened up in the US due to cheap feedstock unlocked by the shale gas boom. Moreover, the company is decreasing gas production in the US region and shifting its focus on drilling activities as they indicate more promising returns. In the wake of these strategic shifts, the end of year production is expected to remain flattish in 2014 hovering around a growth rate of 2-3%.
Minus the acquisition costs, Exxon hopes to bring down its annual capex to around $37 billion some time between 2015 and 2017. This decrease in the capital spending is intended to enhance its ROIC ratio. The company presently delivers a better ROIC compared to its competitors but returns have been dented recently as a consequence of rising costs and flattish commodity prices.
Global oil demand is expected to rise to approximately 1.14 million barrels per day (mmbpd) in 2014 which is an upward revision to the previous projection of 1.09 mmbpd by OPEC. The main driver of this growing demand is non-OECD countries since these are growing economies. While demand is declining at a rate of 200,000 b/d in OECD countries, non-OECD countries are projected to show a rise in demand by 1.2 mmbpd. This growth or the lack of it thereof is indicated in the graph below with a breakdown as per the energy source.
Source: 2014 Analyst Meeting
Although the demand for oil and gas is growing the oil resources are depleting. We are presently in a maturing industry with UK production rapidly declining at a rate of around 6% per year. Capital expenditures to explore new reserves in the region and to bring technological improvement have risen from $5.2 billion in 2008 to an expected figure of $14 billion in 2014.
Moreover, technological advancement has made the environment even more competitive than it used to be a decade ago. Besides the traditional form of competition from rival firms the competition is also coming in from solar and wind energy discoveries.
Shale Gas Boom and Exxon
Exxon acquired XTO Energy Inc. back in 2010 to penetrate and profit from the shale gas market. There is news, though unconfirmed, that the company intends to become a leader in this market by acquiring Chesapeake Energy Corp. (NYSE:CHK) which is a major shale gas developer. Exxon's subsidiary XTO is already making efforts to expand its shale gas business. XTO Energy has struck a deal with an affiliate of American Energy Partners that was founded by the former CEO of Chesapeake last year. The deal is about a new venture in Ohio's Utica Shale. Terms of the deal indicate that XTO's development costs in a core area of about 55,000 net acres in Utica will be covered up in whole by American Energy in exchange for ownership rights to approximately 30,000 net acres of XTO's holdings in three Ohio cities.
Another deal was struck between and XTO and Endeavor Energy Resources LP to enhance Exxon's Permian basin activity wherein development costs will be paid by XTO in exchange for ownership rights to about 34,000 acres in Wolfcamp shale formation in Midland and Uptown countries. The deal is expected to augment XTO's holdings in the region to more than 1.5 million acres.
These activities will enhance the geographical exposure of the company enabling it to capture new markets. Although Exxon is a late entrant in the shale gas business it is rapidly expanding its reach to achieve a leading position in the market.
Exxon's Expansion Projects Will Help Propel Long Term Margins
The company expects to have ten new plants commence production this year while more projects are in line to start up between 2015 and 2017 bringing Exxon's production capacity to one billion barrels per day. The present year's new plants are inclusive of the liquefied natural gas plant in Papua New Guinea and production augmentation in a plant located off the far eastern coast of Russia. That being said, Exxon's production level in 2017 is still expected to fall short of last year's projection by 500,000 b/d.
Exxon is expected to invest $20 billion in Petrovietnam which is a state owned oil and gas group in Vietnam. The investment is expected to aid in the construction of two gas plants with a combined capacity of 6,000-6,500 megawatts covering an area of around 200 hectares. Back in 2011, Exxon had made announcements that it had discovered potentially significant gas resources off the coast of central Vietnam. Presently, the US is the 7th largest investor in the country; however, this investment will bring up the country's name to the top four investors list next to Japan, South Korea, and Taiwan.
Exxon is expanding its Baytown, Texas chemical plant which will now also incorporate the conversion of natural gas to polyethylene. Since competition in the fuel and gas industry is rising it seems reasonable that the company is considering non fuel markets as well. Note that the Baytown project is already the largest integrated refining complex in the country and the expansion will further strengthen the company's competitive position. The shale gas boom will benefit this project as well.
In Singapore the company has expanded its petrochemical plant wherein the facility is to be established for the manufacturing of halobutyl rubber and Escorez hydrogenated hydrocarbon resin. Construction activities for the plant are to begin around mid-2014 with the completion expected some time in 2017. Note that the company is already a major supplier of halobutyl rubber to the tire industry globally while the construction of the new plant will augment its production capacity by 140,000 tons per year. The expansion will make the company a leading supplier in the industry with the ability to meet long term demand for hot-melt adhesives.
To finance these acquisitions and expansions the company has issued $5.5 billion worth of AAA rated bonds (Moody's). As of now, the company's debt accounts for 39% of the total cash flow. However, considering that the company is utilizing most of this debt to finance its acquisitions and expansions it will lead to higher operating cash flows in the future thus enhancing the company's topline and ability to pay off its debt from continuing operations.
Declining capital expenditures are generally a cause of concern, but in Exxon's case it meets with the maturing industry trend. As of now Exxon is making very smart investments to strengthen its competitive position in relation to its peers. The company is not only strengthening its core business segments but is also exploring non-fuel markets to diversify its revenue base. Most of the company's projects are expected to be completed around 2016 and 2017; however, 2014 will indeed remain a slow growth year. Sacrificing the short term gains, I believe that Exxon remains a good candidate for long term investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.