Fantasy From Exxon Mobil As Reality Confronts The Share Price

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About: Exxon Mobil Corporation (XOM)
by: Keith Williams
Summary

Exxon Mobil spells out underpinning assumptions for dramatic expansion of oil and gas production.

World energy needs are increasing; XOM claims fossil fuels needed to do the heavy lifting.

Renewable energy largely irrelevant (XOM says 4% contribution by 2040); intermittent, storage inadequate, too slow.

Society wants less carbon emissions but they must be reliable and affordable; XOM hopes carbon capture will solve the problem.

Assumptions about renewable energy and emissions mean Exxon Mobil’s business model is fatally flawed, with serious consequences.

Once upon a time, only a select few had access to pearls of wisdom from the CEO of major corporations. Today, thanks to pioneering groups like Seeking Alpha and ease of data access, someone like myself in the Aussie bush can be figuratively “at the back of the room” when the CEO of Exxon Mobil presents at a banking conference in New York.

Here I reflect on a 4 September presentation Exxon Mobil (NYSE:XOM) Chairman and CEO Darren Woods. In this presentation Woods outlines the key underpinning assumptions on which XOM is basing its aggressive expansion of oil and gas exploration, which will mean dramatic expansion of greenhouse gas emissions as the products are consumed.

I reviewed the presentation and comments shortly after submitting a recent article in which I suggested that Exxon Mobil’s problems of its underperforming share price were structural rather than cyclic. The presentation by Woods was so at odds with my experience of the current status of new energy developments and climate issues, that I dug into key assumptions made.

Exxon’s 8 year plan is focused on oil prices and earnings on the basis of various scenarios involving just different oil pricing, nothing else. While one can argue that demand will affect price and indeed how much oil gets consumed, the plan shows no serious consideration that oil & gas might be under threat from competitors or by the need to reduce emissions.

The rationale for ignoring demand is that energy need is increasing and Woods goes into some detail in explaining why renewable energy isn’t a solution. Readers will appreciate that Seeking Alpha is an investment site and not a place for detailed comparisons of technologies. However, since a core plank of XOM’s business strategy, and the basis for dramatically expanding production of oil and gas, involves technology, it is important to examine whether assumptions made about renewable energy can withstand scrutiny. Here I briefly show that key assumptions made by XOM regarding renewable energy not being a competitor for its products, do not have a sound basis.

Can renewable energy make a significant contribution fast enough?

On renewable energy, Woods says there are:

...limited areas with enough sun and wind. They require significant land area and are intermittent with no practical storage solutions that work at scale.

Woods also indicated that the rate of adoption of renewable energy can’t possibly lead to significant capacity in the timeline needed by a developing world. To raise such objections in 2019 indicates either a lack of on the ground knowledge, or an attempt to obfuscate. I suspect the latter.

Renewables require significant land area

There is a lot of noise about how much space solar and wind farms take up. In fact wind and even solar farms are consistent with continued agricultural use. Indeed having windmills or solar farms are seen as attractive by some farmers as they provide a stable income source for an industry that is boom and bust due to various unforeseen catastrophes.

As to whether there is room to power the world with solar and wind, a new report suggests that Europe could power the whole world with onshore wind farms alone! Offshore wind has immense capacity, with US offshore wind resources of more than 2000 GW (nearly double US electricity use). Solar capacity just on rooftops is similarly immense.

Renewable energy generation is intermittent

Solar and wind power are intermittent, but they are also predictable based on weather forecasting. So authorities get increasingly accurate estimates of solar and wind power generation as the time of dispatch approaches. This is useful for two reasons. Firstly, the amount of power likely to be generated is accurately estimated, allowing power suppliers time to manage power supply. Secondly, weather forecasting helps provide information about fluctuations likely to affect demand. Indeed there are now services that provide customers with predictions about these issues. Note that this is different from the problem with old coal and nuclear plants, which may suddenly go off line (unpredictably) in extreme heat. In Australia it is unpredictable failure of old coal plants that is the cause of potential power failures.

Woods also ignores the (increasing) role for demand management. Power capacity used to be built to cope with the most extreme power requirements. Today it is recognised that it is very inefficient to operate this way and so with sophisticated electronics power needs can be mitigated. There are demand management programs being adopted all around the world. Here is an example from the Tennessee Valley Authority which has recently commissioned a cloud based system to manage demand response.

weather forecasting and power generation Source: Advanced Energy Intelligence LLC.

No practical storage solutions that work at scale

This statement by Woods may have had some currency a decade ago, but I have no idea on what basis this statement can be made today.

There are 130 GW of pumped hydro solutions, and virtually every planned wind and solar development involves some battery storage capacity to smooth production. A recent study indicated that there are 530,000 off-river sites around the world suitable for pumped hydro facilities, with a potential capacity of 22 million GWh storage. A very small fraction of these sites could support 100% renewable energy.

All over the world massive renewable energy projects are underway. Many of these involve ancillary major battery storage or pumped hydro storage. To give one example of what is happening, in Australia the state of South Australia gets more than 50% of its energy from renewables (wind and solar) now and with projects in the planning phase, achieving 100% renewable energy for the state is almost certain to be achieved well before the planned goal of 2030. This link outlines the projects that will achieve this (wind, solar and their storage component).

It will take a long time for significant contribution by renewable energy

I don't understand how Woods can say: “wind and solar today represent about 1% of the global energy mix and, by 2040, are projected to make up 4%” -- but that is what he stated in the presentation.

A report just out from BNEF gave the following figures : in the past decade (to end of 2019) all major generating technologies (fossil fuel and zero carbon) will see a net 2,366 GW of power capacity installed. Solar power is the largest single source (663 GW), coal second (529 GW), wind (487 GW) gas (438 GW). So solar and wind power will have added almost a half of new capacity in the last decade. Importantly the levelized cost of electricity has fallen 81% for solar PV and 46% for onshore wind over the last decade. This explains why 2018 investment in renewables was $272 billion, about 3 times the combined coal and gas power generation investment. A report from Statkraft2019 Global energy trends” suggests that by 2035, solar power will be the world’s largest energy source and by 2050 solar will contribute 40% of the world’s power.

BP’s (NYSE:BP) global energy outlook indicates that solar and wind will contribute ~8% of global power generation by 2020 and more than 25% by 2040. The BP report states: "renewables are the largest source of energy growth, growing in importance in global power markets." Of great significance is that “growth in renewable energy is dominated by the developing world, with China, India and other Asia accounting for almost half of the growth in global renewable power generation."

Carbon capture

As cover for the expansion of its oil and gas production, XOM is saying quite a lot about carbon capture, which includes partnerships with two specialist carbon capture companies, Global Thermostat and Mosaic Materials. Both announcements have lots of “potential” and little on demonstration. Indeed the following quote from the press release concerning the Mosaic Materials partnership, describes XOM’s contribution to carbon capture and shows how irrelevant it is to the overall story of emissions reductions:

For more than 30 years, ExxonMobil engineers and scientists have researched, developed and applied technologies that could play a role in the widespread deployment of carbon capture and storage. With a working interest in approximately one-fifth of the world’s total carbon capture capacity, ExxonMobil has been able to capture about 7 million tonnes per year of carbon dioxide and has cumulatively captured more of it than any other company since 1970.

XOM’s 30 year program on carbon capture has resulted in 7 million tons per year of carbon dioxide captured, while fossil fuel-related emissions in 2018 were 37.1 billion tons of CO2. So XOM’s carbon capture efforts amount to 0.02% of carbon dioxide emitted by burning fossil fuels and there is no sign that this could be scaled up in the time frame needed to have an impact.

The above shows that renewable energy can be, and is, a competitor for oil and gas. This competition is getting more intense as the cost of solar and wind decreases and storage and demand management becomes well established. There is no problem about electricity generated from solar and wind providing the energy needed to supply 100% electrified transport within decades. It is worth remembering that 44% of oil consumption is by ICE vehicles, so electrification of transport is a huge threat. It is interesting that each annual energy report from BP increases the projected penetration of electric vehicles.

My take is that the energy agencies continue to underestimate the uptake of electrification of transport and I contend that the next 3 years will demonstrate how fast electric vehicle adoption is going to be. For example Volkswagen released the ID.3, its first (of many) electric car with big statements about how significant this is, at the Frankfurt Motor Show. Volkswagen is comparing the ID.3 with its legendary Beetle and Golf models that represented major advances. And Renault is releasing in China its Kwid/K-ZE electric, which is a credible battery electric vehicle with 250 km/155 mile range, for under $9,000! Not to be outdone, BMW released a fully electric version of the iconic Mini at the Frankfurt Motor Show. These announcements demonstrate astonishing developments in transport electrification.

Likewise gas is increasingly involved in a fight with renewable energy and storage in delivering grid stability. A report just out concludes that by 2035 90% of gas plants proposed in the US will be more expensive to run than new build wind and solar plus storage. The report suggests that gas plants being designed now are likely to become uneconomic before they are paid off.

What about the climate?

Woods states:

Our outlook is also in line with the commitments made under the Paris Agreement. This view underpins our strategies and plans.

In relation to emissions reductions, the IPCC is increasingly active in pursuing climate action. A recent IPCC report concerning 1.5C temperature increase (not safe but hopefully tolerable), states the following:

In model pathways with no or limited overshoot of 1.5°C, global net anthropogenic CO2 emissions decline by about 45% from 2010 levels by 2030 (40–60% interquartile range), reaching net zero around 2050 (2045–2055 interquartile range).

For clarity, the above quote states that to address the coming global emergency all fossil fuel emissions need to cease by 2050, and they need to decrease 45% from 2010 levels by 2030. This is the current Paris position.

In my previous article on XOM I indicate that not only does XOM plan to dramatically expand its oil and gas production, but in several projects its expansion plans have dramatically increased between 2018 and 2019. So XOM is doubling down on increasing emissions at a time when the Paris Agreement is doubling down on stopping fossil fuel exploitation.

The number of climate action legal cases is accelerating around the world. A recent report (July 2019) indicated that there were 305 climate cases in 27 countries in the 12 months from May 2018.

Hence two key assumptions (renewable energy isn’t competitive and increasing emissions doesn’t matter) made by CEO Woods are problematic. If the actual situation concerning these assumptions is considered, there is a huge threat to XOM’s future business plans.

Conclusion

In times of great change old certainties fade and the unthinkable becomes reality. Darren Woods, President and CEO of ExxonMobil, has presented a view of the world that fits the comfortable confines of a company that was once the largest company on the S&P500. It doesn’t reflect today’s reality and this is a very important thing for investors to take note of.

For those who see the climate emergency as something of little consequence, choose any week and look around the world. This week the state of Queensland in Australia is suffering the worst bushfire threat in recorded history, with 73 fires burning at the start of spring. Bahamas has just suffered the brunt of hurricane Dorian, one of the strongest Atlantic storms to ever hit landfall.

These kinds of events are now part of the daily news cycle. They are why there is increasing scrutiny of companies that are intent on making the emergency worse. And working against XOM and other major oil and gas companies is intense competition coming from renewable energy.

Does XOM have the expertise it needs to navigate the future? The board of XOM is curiously structured, with the skills base of directors heavily skewed to health and pharma -- Merck (MRK), Johnson & Johnson (JNJ), MetLife (MET), WellPoint -- and big corporate -- IBM (IBM), PepsiCo (PEP), Veon (VEON) -- with just one director with an engineering background (from Caterpillar [CAT]). There are no energy professionals or any sign of new energy thinking. One director has climate science experience. CEO Darren Woods is the only oil & gas industry member of the board and he is steeped in XOM, having joined the company at age 27 and spending the past 27 years in various executive roles in the company.

Is this a board well equipped to cope with the challenges XOM is facing?

Author's note: I am not a financial advisor, so my commentary is to provide qualitative insights, especially in the energy and transport sectors in a time of great change. Consider asking your financial advisor about my commentary if you are thinking about investment in XOM and if you own the stock, reflect on whether there might be a safer investment for your hard earned savings. If my writing helps with your investment strategies, please consider following me.

Disclosure: I/we 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.