For the past several years, the name of the game in the oil and gas business has been cutting capital spending to stay within cash flows. That's not exactly easy when oil prices are in decline. Now that the oil-price ship seems to have found its course again, ExxonMobil's (NYSE: XOM) management is talking about some of the things it wants to accomplish, since it's generating enough cash to pay for it.
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Here are some quotes from ExxonMobil's most recent conference call that show where the company is seeing a lot of promise, as well as how it plans to address some shareholder concerns.
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Quick peek into the future
With ExxonMobil's analyst day coming up, Senior Vice President Jeff Woodbury didn't give a whole lot of detail on plans for 2017 and beyond, aside from this little tidbit:
Looking ahead, we anticipate our 2017 capital and exploration expenditures to be about $22 billion. We know there will be a lot of interest in our investment plans, and we will share additional details in a few weeks at our analyst meeting.
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That figure stands in comparison with the $19.3 billion the company spent in 2016. When pressed about the uptick in spending, particularly whether it was from raising costs from service companies, Woodbury explained that a large part of that spending is for higher activity and incremental gains, mostly in its upstream production.
Shale development continues to improve
ExxonMobil and the other integrated majors have been criticized for not embracing shale more and making it a bigger part of the portfolio. As Woodbury points out, though, that slower growth has more been focused on learning how to attack its holdings in the most economical way. As a result, the company is now leveraging that learning period into production gains:
Our ownership and operating position enable flexible development and allow us to maximize learning curve benefits through the cycle. For instance, in the Permian Basin, where we operate 2/3 of our production, our average drilling footage per day has increased about 85% since 2014 because of continuous learning and application of ExxonMobil's proprietary Fast Drill Process. We continue to focus on liquids growth through development activities and strategic farm-ins and acquisitions. Since 2010, XTO [Energy, an ExxonMobil subsidiary] has grown liquids production at a compounded annual growth rate of about 11%, and which currently represents about 12% of the corporation's global liquids production.
Things like this can get lost in the fray of such a large company, but shale is becoming a stronger part of the business.
A powerful Permian player
Last month, ExxonMobil made a big splash by acquiring a large acreage position in the Permian Basin for $5 billion. The Permian has been a hot commodity because of the great well economics it produces. It's not that surprising, then, to hear Woodbury extol the virtues of this new asset and how much potential it has for the company in the coming years, as well as its potential for profit. I've highlighted a section that should really get investors excited:
Less than 5% of the acquired resource has been developed to date, providing substantial opportunity for future growth. As a result of our proven capabilities, we are well positioned to maximize the value of this resource. This acquisition will add an estimated 3.4 billion oil-equivalent barrels in multiple stacked pace -- plays, 75% of which is liquids. The highly contiguous nature of the acreage will also provide significant cost advantages by combining XTO's low-cost execution capabilities with proprietary technology from upstream research company. We plan to drill the longest laterals within the play, which will maximize per well recoveries and help generate market-leading development cost. More than 85% of the wells are expected to have lateral lengths 2 miles or longer because the acreage is not constrained by traditional land lease issues. This transaction increases ExxonMobil's inventory of Permian drilled wells that yield at least a 10% rate of return at $40 per barrel to more than 4,500 wells. We currently produce more than 140,000 net oil-equivalent barrels per day in the Permian and are operating 10 rigs. This is expected to move higher in 2017, as we begin activity on the newly acquired acreage.
LNG outlook is good -- if you're patient
Liquefied natural gas has been a pretty hot topic for investors as of late, and ExxonMobil just received approval for its Golden Pass LNG facility from the Federal Energy Regulatory Committee. While there is certainly a long-term opportunity for LNG, Woodbury explained that ExxonMobil isn't in a rush to develop this asset because there is going to be some short-term lumpiness in the LNG market:
Over the long term, we expect that LNG capacity or demand will continue to grow. In fact, almost something like 250% of today's LNG capacity. A large part of that growth is primarily driven by Asia. Now like most commodities, you're going to have periods in which there's oversupply and periods where there's insufficient supply. And we do expect that with the number of projects coming on that there are some projects that -- well, there's a period in which we'll see LNG oversupply. Now if I step back from that, that's the -- if you will, the value proposition, and I step back, we've got a very extensive portfolio. And I would tell you that brownfield developments -- that is, incremental investments to the existing operations, like Papua New Guinea or even Golden Pass -- provide us [an] economic advantage by lowering the cost, by leveraging the installed investment. At Golden Pass, as you noted, we did get FERC [Federal Energy Regulatory Commission]approval. The one key step that we're still waiting for after many years is final Department of Energy approval of non-FTA [free-trade-agreement] export authorization, and we're hoping that that will come shortly. But each one of these projects will be evaluated on their own merit. As you've heard us say previously, as it relates to LNG projects, we want to lock in a large part of the -- that capacity on long-term contracts. And Golden Pass, within the whole portfolio of investment opportunities that we have, we're pursuing long-term sales contracts.
Several of ExxonMobil's competitors have either come under scrutiny for executive pay or have recently changed their executive-pay contacts. When asked about this, Woodbury said why he thinks the system the company has in place is best suited for long term investors and why ExxonMobil will probably hang on to its current structure:
[R]emember that a large part of our compensation program is based on a long-term payment schedule. And it is intended in order to make sure that our executives are being held to the decisions that we're making over the long term. And our long-term incentive is paid over a 10-year period, 50% about five years; the remaining 50% after 10 years. Really, it's the later of 10 years or retirement, so some of us go even beyond 10 years. But it's really designed to ensure that our executives feel the same performance that our investors feel because when it does pay out, it's paid out at the current stock price. Now I'll tell you that the Compensation Committee does step back and look at the program periodically to make sure that it's ensuring, it's encouraging the right type of behaviors, and it's recognizing the success of the corporation.
Anyone investing in this company for a decade or more has to be encouraged that executive pay with these companies is structured on such a long-term time horizon, as the incentives for managementare much more in line with the investment time horizon for its shareholders.
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