Exxon Punished for Departing From Big Oil’s Austerity Hymnal

LAGOS (Capital Markets in Africa) – Exxon Mobil Corp. is ramping up capital spending even as the rest of Big Oil preaches prudence. Investors punished the outlier.

The world’s biggest publicly-traded oil company by market value unveiled an aggressive revamp of its upstream portfolio on Wednesday, lifting cash outlays by at least 25 percent to more than $30 billion a year in the early 2020s. That’s in stark contrast to rivals such as Chevron Corp. which are scaling back project spending.

Exxon also failed to announce a return to share buybacks, prompting disappointed investors to squeeze the company’s stock by 2.5 percent on Wednesday and wipe out $8.1 billion in market value. Exxon is the worst-performing major oil company tracked by Bloomberg this year; its market premium to Chevron has dipped below $100 billion for the first time since the turn-of-the-century mergers that created the companies in their modern forms.

The spending increases are “eroding our confidence in material share buybacks in the near term, something which we believe was anticipated,” said Brendan Warn, an analyst at BMO Capital Markets. “The steep increase in capex is hinting that the likelihood for material buybacks is low.”

Exxon shares rebounded 0.4 percent to $74.54 at 9:03 a.m. on Thursday in New York.

In a presentation to analysts and investors at the New York Stock Exchange, Chief Executive Officer Darren Woods was adamant that investing in new projects will shrink Exxon’s overall production costs, benefiting shareholders in the long run.

Red ink
Although he promised to continue raising dividends and keep a lid on debt, he never mentioned resurrecting buybacks that were halted two years ago. By contrast, Chevron CEO Mike Wirth hinted a share buyback may be coming at a separate presentation on Tuesday.

“I don’t believe there’s a competitor out there that can match the opportunity set that we have available to us today,” said Woods, who succeeded Rex Tillerson in early 2017. “If you’ve got a good set of opportunities in house why wouldn’t we invest in that?”

As a result of the plan, Exxon’s free cash flow deficit probably will deepen to about $8 billion during the 2018-2022 period, William Featherston, an analyst at Credit Suisse Group AG, said in a note to clients. That’s more than three times the $2.5 billion of red ink he previously forecast.

Exxon’s rivals are “delivering more immediate growth & are better positioned to return cash to shareholders,” Featherston wrote. The plan leaves Exxon “with materially higher capex outlays over the next several years and carries substantial execution risk.” To be sure, the plan will have positive, long-term impacts on Exxon’s production and earnings profiles, he noted.

Exxon has used the downturn in oil prices, which tumbled from more than $100 a barrel in 2014, to assemble a vast array of projects all over the world that will start to replace older, mostly higher cost production from the early 2020s. The five key projects that will consume some of the capital spending are:

• Offshore Guyana: some 3.2 billion barrels of reserves already discovered
• Offshore Brazil: a 2 billion barrel field established with more exploration coming
• U.S. shale: production expected to grow fivefold by 2025
• Papua New Guinea liquefied natural gas: exploration and development planned
• Mozambique LNG: exploration and development planned

“While it may make sense for longer term, it is counter to peers and market desire to return more cash to shareholders,” Brian Youngberg, an analyst at Edward Jones & Co. said by email.

Source: Bloomberg Buin