ExxonMobil - the oil world's champion
ExxonMobil hasn't exactly sailed through the downturn. But it remains convinced by oil's long future and undeterred by commodity cycles
If a test of management is the ability to ride tough times, ExxonMobil is in the exam hall.
The world's biggest publicly traded oil and gas company is caught in an upstream bind as it invests heavily in unconventional fuels, in some cases at hefty prices, while struggling with the production of the crude that its own research predicts will provide most of the world's energy for another 20 years. Exxon's sanctions-hit Kara Sea exploration in partnership with Rosneft is a case in point.
Its model remains positively old-fashioned. Collaboration is the buzzword in the industry these days, but Exxon is sticking to vertical integration: downstream profits, it thinks, are the natural hedge against upstream losses. Its "understanding of the full value chain leads to resilient investments and operations", the company says.
Exxon calls this "molecule management", meaning every dollar spent is designed to capture the highest possible value for every scrap of energy in the supply chain. It's why 80% of refining capacity across the group is integrated with the manufacture of chemical and lubes right down the line. Exxon is also building a global supply organisation including an enterprise IT system that tracks every transaction right to the customer's door. Control has always been a feature of one of the world's most successful oil firms.
But Exxon certainly hasn't flown through the price slump. Long liked by investors for its bullet-proof balance sheet, Exxon's downgrading in April by ratings agency Standard & Poor's (S&P), to AA+ from its 67-year grip on the cherished AAA, was a blow. But the company could hardly complain. The main reason for the downgrade was a daring spending spree in 2015 that exceeded by a startling 40% the combined cash flow from both operations and asset sales.
It's unlikely S&P will be in a hurry to hand back the triple A. Estimated 2016 second-quarter earnings slumped to $1.7bn, down from 2015's corresponding quarter earnings of $4.2bn. Weaker refining margins and the drop in commodity prices, Exxon said, were to blame.
Inevitably, investors are drifting away from the stock. Over the past five years, shares are down by around 1.5% versus the S&P 500-though the price has held up better than the sector as a whole. In January 2016, the company announced it would suspend its long-term share-buyback programme. Exxon remains cash-rich and its finances are prudently managed. In March it had little trouble raising $12bn in cash from bonds, prompting suggestions the company may be looking to buy the upstream assets it seems to need.
Looking ahead, the group promises a return to financial respectability. It aims to cut capex by 25% through 2016 and hammer away at what it calls "cost deflation"-money-saving efficiencies achieved across its entire operations. So, while splurging on big-ticket projects in 2015, it was still able to slash $11.5bn in capital and cash operating costs. As a result, Exxon says its refining unit cash costs are 15% lower than the industry average. Also axed in the second quarter were capital and exploration expenses, down by 38% to $5.2bn. Exxon still handed out $3.1bn in dividends in the second quarter.
Still, upstream earnings remain a concern. In Q2 2016, they languished at $294m while production volumes of 4m oil-equivalent barrels a day hardly budged (liquids rose 1.7% and natural gas fell 3.6%). The trend is downwards-in the final quarter of 2015, upstream profits were $857m, with the US business particularly hard-hit. On the bright side, the growth in liquids production from recent start-ups, says the company, "more than offset the impact of field decline and downtime events".
The latter refers to the wildfires in Alberta's oil sands and Nigeria. The former knocked 60,000 barrels a day off production at its Imperial Oil subsidiary and, combined with low crude prices, led to a $181m loss in the second quarter. As for Nigeria, in July Exxon declared force majeure on exports from its Qua Iboe crude oil terminal after yet another "pipeline anomaly". Shipments restarted in October.
Other problems have appeared. In October, the high court in N'Djamena ordered Exxon to pay a huge $74bn fine-supposedly related to unpaid taxes-and $0.819bn in unpaid royalties. Exxon operates a pipeline carrying crude from Chad to a marine terminal in Cameroon. It denies the court's claims.
Back home, the Texas-based group is embroiled in a battle with climate-change activists, fending off allegations that it misled shareholders that suppressed scientific research that, its accusers say, clearly forewarned of the commercial risks of climate change. State attorneys in New York and California probed the claims, which even garnered a social-media hashtag: "#ExxonKnew". Another 15 states have joined in. Fortune magazine describes the campaign as Exxon's Achilles Heel.
Is it? Senior management strenuously deny the charges, insisting that Exxon not only engages fully with the principles of COP 21, the UN's most recent climate-change meeting, but has long worked towards the development and deployment of technology that mitigates greenhouse gas emissions. Exxon cites the $7bn it has spent since 2000 on the development of lower-emission technology.
Harder-nosed investors will probably discount the threat, focusing instead on Exxon's spending plans. Fearless as was last year's outlay, the firm insists it was based on competitive advantage according to a disciplined set of company-wide principles. First, acknowledging that cycles will always bedevil the energy sector, any projected capex is stress tested. Next, all major investments are analysed in the light of the advantages they provide compared with the rest of the industry.
"This enables us to mitigate the impact of the bottom-of-cycle conditions as well as maximise returns at the top of the cycle," says Neil Chapman, president of ExxonMobil Chemicals, one of the few divisions delivering profits right now.
An unshakeable faith in continuously enhanced technology underpins the company's long-term strategy. This is best seen in project management, which the group considers key to unlocking value from massively expensive projects such as a new liquefied natural gas facility in Papua New Guinea.
Using a lightweight infrastructure, ExxonMobil has been able to tap reserves spread over more than 190 mountainous km. It's a genuine feat of construction. It's also installed a 300km-long onshore pipeline and a 400km-long offshore pipeline linking up with the new two-train liquefaction plant on the coast northwest of the capital of Port Moresby.
Exxon spends much time and energy on technology and maintenance to keep things running. Between 2011 and 2014, reliability across all its facilities rose from 94 to 96%. The two percentage points yielded an extra 90,000 b/d. It was, said senior vice president Jack Williams late last year, comparable to net production from a multi-dollar new investment "for a tiny fraction of the cost".
Exxon, as ever, is also convinced of the hydrocarbon future-whatever today's price volatility. "Have any of the fundamentals changed?" asked chemicals boss Chapman in a speech in March. "At ExxonMobil we don't believe so. Petrochemicals is subject to cycles that all commodity businesses go through … we continue to see a world in which global living standards improve and demand for chemical products continues to grow."
It predicts global demand for chemicals will rise by about 4% a year over the next decade, with two thirds stemming from Asia-Pacific, especially China and India. It's this faith in oil's long term that encouraged Exxon to invest nearly $6bn to boost production at its Baytown plant near Houston, already the largest refining complex in America, and build a third steam cracker that will increase ethylene capacity to 3.7m tonnes a year from 2.2m. The project is due for completion in 2017.
Although capex on upstream projects is slowing - $5.2bn in the second quarter, down 38% from a year earlier - Exxon is starting to reap the dividends of earlier investment. Production at the Julia field in the Gulf of Mexico, 430km southwest of New Orleans, started ahead of schedule and under-budget. Exxon expects around 34,000 b/d from its development phase.
Production also began at gas-rich Point Thomson on Alaska's North Sea Slope, the first time Exxon has operated there in its own right. At peak, the project should yield 10,000 b/d of condensate and 200m cubic feet a day of dry gas.
One of its most important collaborations is in Abu Dhabi through the Zadco joint venture that is redeveloping one of the world's largest offshore oilfields at Upper Zakum. By using extended-reach drilling techniques with long horizontal completions, the operators are able to access the entire field from four artificial islands, and plan to boost output to 0.75m barrels a day by 2017 (Exxon's has a 28% stake).
But Exxon also needs to make major discoveries of its own, especially now that the promising Kara Sea joint venture with Rosneft has been frozen because of Western sanctions on Russia. Some analysts like the look of the company's foothold in the Permian and Bakken, two of the US' most prolific shale plays. These yield the Exxon 220,000 b/d. The company arrived late to US unconventional energy. But the consensus expects technology to work to its advantage, increasing the company's tight oil output.
Above all, Exxon believes in the longevity of its business. It thinks total demand for energy will grow by about a quarter over the next 25 years, most of it in the developing world. As chief executive Rex Tillerson puts it: "A 25% increase is like adding to the current energy demand another North America and Latin America combined."
Right on cue, an Exxon upstream play in the energy-hungry part of the world obliged. In the second quarter of 2016, the latest drilling results from Liza-2, the second well in the Stabroek block in offshore Guyana, confirmed a "world-class discovery", with an estimated 0.8bn-1.4bn of recoverable oil-equivalent barrels.