Exxon Mobil (XOM) announced second quarter 2012 earnings of $15.91 billion dollars or $3.41/share (diluted). These results compare quite favorably with the prior year's Q2 earnings of $10.68 billion and $2.81/share. However, this quarter's results included one time gains of $7.5 billion associated with divestments and tax-related items. Excluding these items, earnings were $8.4 billion, down substantially from the prior year.
On an oil equivalent basis, production was down 5.6% from the second quarter of 2011. Excluding divestments, OPEC quota effects, and the impact of entitlement volumes, production was essentially flat.
Exxon's stock has appreciated nearly 150% over the past 10 years. However, over the last 5 years the stock hasn't been able to make much progress at all (see chart above). Many financial analysts believe the $41 billion takeover of XTO and a subsequent drop in natural gas prices have much to do with Exxon's stagnant stock price. I agree. What boggles my mind is why Exxon's management, after its huge investments in Qatari and American natural gas, refuses to strongly support natural gas transportation in the United States. I will make the case why they should do so.
There are (at least) 7 major reasons why XOM should strongly support natural gas transportation in America. I am not just referring to the long-haul trucking sector here. I mean natural gas transportation across the board including cars and small trucks - NGVs for America's middle class. Here's why.
Reason #1: Exxon Mobil is the leading natural gas producer in the United States.
Here is a list of the top-10 natural gas producers in the United States as of Q1 2012 according to the Natural Gas Supply Association (NGSA).
Top-10 U.S. Natural Gas Producers (Q1 2012)
Southwestern Energy Co.
BHP Billiton (Petrohawk)
The top-40 producers are listed in this NGSA PDF document.
It is clear any increase in the price of natural gas would greatly benefit Exxon Mobil. Every $1 rise in the price of American natural gas would correspond to roughly $4 million/day to Exxon Mobil. Over the course of a quarter, this would amount to in the neighborhood of $360,000,000 bucks. That ain't chicken feed - even for XOM. That said, the huge natural gas supply overhang unleashed by fracking and its associated drilling technologies are keeping a lid on prices. Absent some new source of demand, will natural gas prices go up much anytime soon? Probably not. Here is why.
There are more than 14,000 oil & gas companies active in the United States. Most of these are small and medium sized independent producers. According to the NGSA and the U.S. Energy Information Agency (EIA), the 10 biggest nat gas producers account for only one-third of all U.S. production. Indeed, the 40 largest producers pump just over half of all domestic natural gas. Not that it was Exxon Mobil's intent when they purchased XTO, but it is clear that Exxon Mobil cannot "corner the market" in order to boost natural gas prices. Nor can they collude with the thousands of small and medium sized independent producers to keep supply off the market. This is because every time nat gas prices rise a bit, additional shut-in supply will come online very quickly and knock prices back down. The only way natural gas prices will rise, and stay firm for the long term, is if significant and constant new demand is introduced. Although the electrical power generation and chemical sectors are beginning to take advantage of low natural gas prices, abundant supply is very easily meeting this incremental demand.
Obviously much more demand is needed if natural gas prices are to rise and stay firm. We need additional demand from a new source. Natural gas transportation is that new source.
Reason #2: Natural Gas Transportation Will Smooth out the Demand Cycle
Natural gas demand has historically been quite seasonal in nature. In winter time natural gas storage supplies are drawn down. Supplies are then replenished in summer and fall. With electric utility companies increasingly shutting down coal plants and/or switching to natural gas generation, the amount of natural gas needed for summertime air-conditioning has been increasing. This is good. However, there is still a lot of weather watching and cyclical impacts affecting in the natural gas market. Natural gas transportation would go along way in smoothing out demand over the course of a year. Since XOM is such a large natural gas producer, smoothing out demand would make it much easier for management to plan, budget, and efficiently monetize its huge natural gas portfolio.
Reason #3: Natural Gas Vehicles (NGVs) are Superior to Electric Vehicles (EVs)
Despite U.S. government support for electric battery makers and EVs, the effort has been very ineffective and a colossal waste of money. A recent article said, despite the government's best efforts NGVs outnumber plug-in hybrids by 2:1 (120,000 to 60,000). After all, how can a struggling American middle class afford a Chevy Volt at a cost of over $40,000? Meantime, a Prius with a natural gas engine (as opposed to its current gasoline power ICE) could be manufactured for around half the cost of Volt. Indeed a Honda Civic GX, the only pure NGV automobile available to Americans, is prices around $26,000. Natural gas vehicles have been around for nearly 100 years. They don't require large "research" investments the battery and EV industry requires. We have seen nothing but bad news headlines out of the EV and battery industry in spite of all the money sent their way. Witness these quotes from presentations at the Society of Automotive Engineers World Congress as provided in a Wall Street Journal article entitled Engineers Cast Wary Eye On Role of Electric Cars:
"By 2025, we see battery electric vehicles still with too long a payback, and inadequate range". - Joseph Bakaj, VP for powertrain engineering at Ford Motor Co (F).
....batteries for the electric Ford Focus costs $12,000 to $15,000 for a car that is priced at $39.200, about $15,000 more than a petroleum fueled Focus. - Alan Mulally, CEO Ford.
...by 2025, a customer who buys a plug-in hybrid could wait 10 years to recover the added upfront costs, compared with a 2025 car outfitted with a more efficient gasoline engine. - Robert Bienefeld, Honda Motor Co. (HMC).
EVs are a big distraction. After all the time, money, and effort we have still yet to see an affordable all-electric automobile offered to the U.S. middle-class market. Don't hold your breath. Meantime, we know natural gas vehicles work, so let's just get on with it!
Reason #4: Nat Gas Transportation Will Return the U.S. to Economic Growth and Prosperity
Many economic "experts" and "policymakers" seem to think the greatest economic problem facing the U.S. is its large deficit. While I agree that the fiscal deficit IS a big problem, these analysts fail to understand how we got here: the oil crisis and America's dependence on foreign oil imports. This is the source of U.S. economic weakness. I've covered this issue ad nauseum in past articles on Seeking Alpha. Here is one example article - Foreign Oil Dependency: The Root Cause of America's Economic Pain. Boone Pickens has also done a great job in educating Americans and government officials on the matter (although it apparently goes in one ear and out the other). All I will say in this article is that every barrel of foreign oil (i.e. gasoline) replaced by American produced natural gas to provide transportation is another $100 that will stay in this country, will provide jobs here at home, put more money in the pocket of Americans, and will increase economic growth and consumer spending. It will also provide demand for all that natural gas that Exxon is selling so cheaply today. Returning prosperity to middle class Americans will also increase demand for all the other products Exxon Mobil sells in its energy and chemicals businesses. Instead of complaining about sluggish economic growth in the U.S., XOM executives should look in the mirror and ask what they can do to return the U.S. to economic prosperity. Natural gas transportation is the answer! If only Exxon would take the money it is currently spending on bio-fuels and algae and all the other distractions and put it where it would have immediate and meaningful impact. I mean why go to the trouble and expense of all these more exotic ways to generate methane (CH4) when you already have methane (natural gas) coming out of your ears and it could very readily be used in the transportation sector? No research needed. Let's just get on with it!
Reason #5: Oil is Getting Harder and More Expensive to Find and Produce
Exxon has been having trouble for years now in growing its oil production and replacing its oil reserves. In fact, it's had trouble simply maintaining flat oil production growth. The energy reserves it has replaced over the last 5 years were predominately natural gas. Even if you can find oil it most likely will be in a spot with all sorts of geopolitical issues. The sooner XOM understands the 21st century, as Robert Hefner III predicted in his great book The Grand Energy Transition, will be one in which the world transitions from costly and dirty solid and liquid fuels (primarily coal and oil) to a future where gaseous fuels (natural gas, wind, solar, and hydrogen) dominate, the better off the company will be. Actually, based on their natural gas investments in Qatar and XTO, the company does seem to know this. They just don't seem to know how to profit from the strategy. Natural gas transportation is the way. It will pay dividends on XOM's gas investments for decades to come.
Reason #6: It's Good for the Environment
Ranking up there with Exxon Mobil's refusal to adopt natural gas transportation is the company's historical refusal to accept man-made global warming as a fact. In comments made to the Council on Foreign Relations in June of this year, Exxon Mobil CEO Rex Tillerson apparently believes the solution to global warming is simply to "adapt". Some in opposition to the truth about global warming poo-poo the theory with the simple statement that global warming is "cyclical". Apparently should be so impressed with this powerful word ("cyclical"...) that the debate should be over and done with. Not! Of course weather is "cyclical" - starting with the yearly cycle of four seasons. No argument there. No one disagrees with the observation that the Earth has been warming and cooling for eons. But to say that weather is "cyclical" and that somehow this one magic word ends the debate is preposterous. So, YES, global warming and/or climate change is "cyclical". There is no argument there. However, it is cyclical around a rising temperature trend line. And it seems to me this trend line is sloping upward at an even faster rate than even more scientists may realize. My impression is that if the scientists and meteorologists who support the theory of man-made global warming have made a mistake, the biggest one was that they were way too optimistic: it seems to me the planet is warming much faster than they predicted and the impact of this warming has been much more severe and has occurred much quicker than they anticipated. This year alone we have seen a spring in which temperatures in the northeast U.S. were breaking hundred year highs - and not by a degree or two, but by 8,9 and 10 degrees. Folks in upstate NY were seeing tulips in March! In one day this year we had more tornados than normally occur in an entire season. A small town in Nebraska had 114 degrees in June (not even July or August!). We have seen multi-year droughts in Texas and elsewhere as bad as ever. Sure these are all, taken individually, merely anecdotal. But taken together, over the last 10 years, can we really afford to ignore the warnings that nature is showing us on a daily basis? Of course not.
Enter natural gas transportation. Natural gas engines emit 30% less CO2 than do gasoline powered engines. Additionally, they emit 100% less (that's right, ZERO) of the toxic particulate emissions that gasoline vehicles do. These gasoline particulates are what cause the atmosphere over our large cities to look that pretty red color. Don't be fooled. So, Exxon could change its corporate image from environmentally hostile to environmentally friendly simply but adopting natural gas transportation. This would be very good for the corporate image.
Reason #7: Increase Shareholder Returns (Now…)
The number one responsibility of a publicly held company is to its shareholders. Exxon Mobil has traditionally been a very good investment. However, over the last 5 years it appears to be behaving more like a bond and XOM investors are beginning to tire of the constant conference calls announcing billions upon billions of costly stock buybacks without seeing the stock move up. Meantime, the dividend yield is lowest in its peer group. We're also tired of hearing management complain about the world and U.S. economy. Many investors bought XOM as a hedge against higher oil and gasoline prices. Well oil and gasoline prices have been, and still are, quite high! Yet still the stock has not responded. Exxon Mobil today is about 50/50 oil to natural gas production. With natural gas prices so low, and the outlook for the immediate future is for them to stay quite low, Exxon Mobil needs to take proactive measures to increase shareholder returns by leveraging its natural gas assets. The best way to do this is to increase demand by pounding the table in support of natural gas transportation. Otherwise the company is simply not going to fully benefit from what is, in effect, a very large chunk of its portfolio.
In summary, Exxon Mobil should adopt natural gas transportation because it will return the U.S. to economic growth and prosperity, leverage the company's investments in natural gas, and increase shareholder's returns. And oh by the way, it's good for the environment. Lastly, reducing foreign oil imports is simply the patriotic thing to do and must be part of any plan to return the U.S. to its former economic status of #1 in the world.
This same argument also applies to Conoco Phillips (COP) as well. Jim Mulva seemed to be a very pragmatic CEO. It was very hard to understand why, after the company's huge investments in Burlington Resources and Origin, and the subsequent collapse in natural gas prices, Mulva did not become a fervent supporter natural gas transportation. Perhaps Ryan Lance, CEO of the new slimmed down Conoco Phillips, will keep an open mind on the matter. It would be a shame if stale ideology trumped corporate performance and shareholder returns. On the other hand, if the United States were to adopt natural gas transportation in a meaningful way, big natural gas producers like Exxon Mobil and Conoco Phillips would out perform the S&P500 by leaps and bounds! If you are a shareholder in one of these two companies, let their management know if you agree.
There are a host of other companies that would benefit from a major U.S. oil company supporting natural gas transportation. Among them are Clean Energy Fuels Corp. (CLNE), Fuel Systems Solutions (FSYS), and Westport Innovations (WPRT).