Exxon's Declining Output A Sign Of The Times
In a sign of challenges ahead for the world’s biggest oil companies, ExxonMobil today announced a 7.5% decline in oil and gas output over the same time last year.
Though its 3.96 million barrels of net oil equivalent per day still puts it well ahead of all publicly traded oil giant except the freshly expanded Rosneft, the slip shows just how hard it is for a giant to keep replacing declining output, let alone grab some growth.
No doubt that Exxon can survive a slimming down: net income for the third quarter was $9.57 billion, or $2.09 a share, down from $2.13 a share a year ago.
But those seemingly healthy results were undergirded by strong margins in its downstream refining business. Earnings from the upstream side were down 29%.
Some of the lackluster result stems from Exxon’s $30 billion acquisition of XTO Energy in 2010. Buying the big shale explorer added heftily to reserves, but low natural gas prices mean that the fields XTO’s drillers have been tapping are not profitable, at least for now. (See: Inside the Mind of Rex Tillerson.)
Exxon in recent years has become increasingly risk averse in its wildcat exploration after a series of costly dry holes. Veteran managers are loathe to jeopardize their spot at the trough by greenlighting a risky drilling campaign when what they might discover wouldn’t be big enough to “move the needle” anyway.
Showing its yellow streak, Exxon in recent months decided to pull out of Poland after coming up dry on its first two shale exploration wells there. Chevron and ConocoPhillips continue to explore the geology there.
If you’re not willing to explore for big new oil and gas deposits, you have to buy them. Exxon in the last quarter bought known shale assets in the Bakken play of North Dakota (200,000 acres from Denbury) and about 650,000 acres of shales in Canada (the Celtic Exploration deal). There’s no exploration risk in these plays — they already know there’s plenty of oil and gas there — so exploiting the assets instead becomes more of a manufacturing operation, where the same industrial drilling process is repeated across the landscape.
Part of Exxon’s rationale in turning its back on Poland is political. If Poland does turn out to have the massive shale gas reserves that geologists expect, it could become an important strategic counterbalance to Russia’s near-monopoly on selling natural gas to Europe.
Considering Exxon’s recent joint venture tie-up with Kremlin-controlled Rosneft, you’d better believe CEO Rex Tillerson has no interest in ticking off his pal Vladimir Putin.
Indeed, in its earnings release today Exxon touted the newest drilling feat achieved by the Sakhalin-1 consortium, which it shares with Rosneft and other partners in Russia’s far east. To tap the Chayvo field, Exxon drilled the world’s longest well, extending out 40,000 feet.
It’s becoming clear that only through JVs with giant state-controlled companies in the likes of Russia or Qatar that Exxon can generate meaningful growth. Soon, Exxon and Rosneft will begin exploratory drilling into Russia’s Bazhenov shale — believed to be many times bigger than North Dakota’s Bakken shale. Exxon will have more patience there than in Poland.