Ugly Financial News from ExxonMobil and Chevron

By Motley Fool

In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman look two of last week's big stories from the world of oil.

First, they discuss why ExxonMobil(NYSE: XOM) might have to cut the value it's placing on its reserves by a whopping 19%, and where the cuts would be if they do. Second, they consider the reasons why the price tag for Chevron's (NYSE: CVX)Gorgon LNG project in Australia has gone from an estimated $35 billion to an actual $54 billion.

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A full transcript follows the video.

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This podcast was recorded on Nov. 1, 2016.

Sean O'Reilly: I wanted to get your thoughts on a couple of oil majors.ExxonMobilhad the potential accounting scandal --I don't know how to describe it.

Taylor Muckerman:Yeah, the SEC said they were investigating.

O'Reilly:Yeah. And it is kind of wild that theiroil reserves haven't really come down in light of oil prices in the past few years. However, on the other hand, Exxon is known for its conservatism in estimating reserves. So, what's going on here?

Muckerman:So they say.

O'Reilly:Ah, so they say.

Muckerman:They're known for what they say.

O'Reilly:That being said, Exxon might have to lower its reserves.

Muckerman:Yeah, they say they might lower them about 19%. This isn't going to be a global reduction in reserves. This is going to be predominantly coming out of their Kearl Canadian oil sands operations,lowering the expected reserves from that by about 75%.

O'Reilly:Andis that price based, meaning, you and I both know the costsassociated with oil sands.

Muckerman:Yeah,oil sands is one of the most expensive, outside of deep water.

O'Reilly:Stop me if I'm wrong, but it's like $80 to $90 a barrel.

Muckerman:It's close,if you really get into the high tailof the Canadian oil sands. And you saw Royal Dutch Shellsell $1.4 billion of Canadian oil sands assets, maybe a month or so ago. So,just trying to trim down on these higher-cost projects. They'realso going to trim a little bit of reservesfrom other North American fields. Pretty much all coming from North America, predominantlycoming from the Canadian oil sands. This is after they released a38% drop in third-quarter earnings, right along there withTotalandChevrondisplaying lower earnings in this latest third quarter. It isinteresting that they're now sayingthey might lower their reserves. And 19% is no small amount. But then again, they can raise the reserves again once oil prices rebound, if they do.

O'Reilly: For sure. So,really quick, what did you think of Chevron's cost overruns at itsAustralian LNG operations? That'ssupposed to be the growth business, so that's unfortunate.

Muckerman:They'reheavily invested in AustralianLNG, multiple projects, Wheatstone and Gorgon being two of the largest, if not the largest projects, in the whole Australian LNG scene. And yeah, you're looking at total in Australia's LNG market, $50 billion in cost overruns.


Muckerman:Yeah. You're talking about $5 billion more from Chevron, they just announced, on their Wheatstone LNG. Butthe largest by far, you look at its Gorgon project, and that was projected to cost $35 billion, it's now right around $54 billion.

O'Reilly:It was a gorgon when it was supposed to be $35 billion. Now it's a Gorgon.

Muckerman:Now it's a GORGON,every single letter is capitalized. That's not only the most expensive projected, but it's also the most expensivenow being realized--

O'Reilly:Were there hints of this stuff happening?

Muckerman:Theyslowly announced these things, $1 billion at a time,until all of a sudden, you're like, "Holy smokes,that almost doubled the priceof what they were expecting." Granted, these projects supposedly have 30, 40 year lifespans. But you look at the price of LNG in the stock market, when some of these projects were announced back in 2012-13...

O'Reilly:It seemed like a good idea at the time.

Muckerman: ...and it's, like, 2/3 lower now. So,not only are you spending more, but you're not makingas much if you're selling LNGright now. So, they're definitely hoping for a rebound. But they're not the only one.Woodside cancelled a $40 billion project that they were partnering withBPand Shell on.

O'Reilly:There's these capex cuts again.

Muckerman:And Shell cancelled a $20 billion project, the Arrow LNG project. At least they're not overrunning, they're just scrapping them altogether.

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron and Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.