For years, the quarterly conference call for ExxonMobil (NYSE: XOM) was as revealing as a Bill Belichick postgame press conference. Investors gave management quite a bit of slack for being so tight-lipped in the past because the company put up rates of return that were well ahead of its peers.
Recently, though, production slides and eroding rates of return have led to investors clamoring for more transparency. So this past quarter, ExxonMobil started to open up by bringing in executives to explain the goings-on in the company and to field analyst questions during its quarterly conference call.
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Here are a few things we learned from the new, more-open ExxonMobil and what investors should take away from the conference call:
The production decline ends now
For the past few years, many investors and Wall Street analysts have become increasingly concerned with Exxon's production numbers, which have been steadily declining. Fortunately, increasing oil prices and results from its refining and chemical segment have helped to increase earnings despite the lower production volumes. But it is a large part of the reason Exxon's earnings results haven't recovered as quickly as others in the business, and why the company's best-in-class returns on investment have fallen in line with its peers.
According to Senior Vice President Neil Chapman -- the executive on the most recent call -- things should start to improve from here on out: "This quarter was a low point in terms of volumes in the upstream and downstream. Absent of some unknown or extraordinary event, volumes will steadily increase through the second half of the year."
Chapman said that for 2018, production will be more or less flat compared with the prior year. Some of the gains will come from bringing back on line some assets hurt by unplanned events -- an earthquake near its Papua LNG facility and a fire at the Syncrude oil sands facility in Canada. And the growth driver in this early part of the recovery will be its shale-oil drilling in the Permian Basin.
It was part of the plan
As weird as it sounds, some of ExxonMobil's production decline over the past few years has been deliberate. As Chapman mentioned, these declines were not a product of poor operational performance, but a capital allocation decision:
Some of the places where it was drilling -- for shale natural gas in the U.S. -- weren't producing the returns management desired, and it didn't have enough downstream assets like chemical manufacturing to take advantage of the cheap feedstock. So rather than keep producing for the sake of producing, it wound down some of its operations in U.S. shale gas to spend money in other places, like its lucrative offshore discoveries near Guyana.
Guyana gets better by the day
Speaking of Guyana, this is an offshore discovery that management has fast-tracked for development. From discovery to first oil is going to be around five years, which is the offshore equivalent of going to ludicrous speed. It seems as if every quarter, the company has some news about an additional discovery, a resource estimate increase, or a new plan to pump more oil from this prospective block. This past quarter was no different, as Chapman updated us on Guyana:
By 2025, ExxonMobil is targeting production rates of 5 million barrels per day. It has already made the case that production from its Permian Basin shale will be about 750,000 barrels per day, so the addition of Guyana at 750,000 barrels per day would mean that these two assets could represent as much as 30% of production by then.
Spend, or reap the benefits
One of the reasons that many of ExxonMobil's peers are seeing significant increases in earnings and cash flow lately is that they have gone into what you could call a harvest of resources. Basically, they have brought a significant portion of projects into service recently, and are now winding down capital spending to reap the benefits of their labors.
Exxon, on the other hand, is spending heavily compared to its peers on more earlier-stage projects and exploration of new resources, as Chapman explained on the call:
Finding oil in exploration isn't guaranteed, and recently there haven't been a lot of successful exploration finds. Exxon thinks that it is staying ahead of the competition by green-lighting more exploration work. Whether that strategy pays off or not will likely take years to determine. But it is a strategy that ExxonMobil has employed for years, and what has made it one of the most successful oil companies over the decades.
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