The trouble with Big Oil.
By Irina Slav, Oilprice.com:
ExxonMobil reported earnings of US$2.65 billion for the third quarter of the year, or US$0.63 per share, largely in line with analyst expectations. The positive result reaffirmed the company’s reputation as one of the most stable Big Oil players.
In its financial report, the company noted that the annual drop in earnings from US$4.2 billion for the third quarter of 2015 was caused by lower refining margins and chronically depressed oil and gas prices, despite the pickup in crude over the last few months.
Even so, Exxon’s downstream business fared much better than its upstream operations. While earnings from exploration and production stood at US$620 million, chemicals and downstream operations contributed US$2.4 billion combined.
A recent report from the Institute for Energy Economics and Financial Analysis, however, warned that Exxon is suffering from fundamental weaknesses in its financials, which could spell an “irreversible decline” for the world’s top public E&P.
The report’s author, IEEFA’s director of finance, Tom Sanzillo, notes that Exxon has seen a 45-percent drop in its revenues over the past five years, accompanied by cuts on capex, declines in cash balances at the end of each year, and shrinking cash flows.
Lithium prices have tripled over the last few years as the electric car boom starts to take hold. A number of companies are uniquely positioned to generate huge gains for early in investors.
What’s more, Exxon has become increasingly dependent on long-term debt to maintain its dividend policy, the sacred cow of energy companies.
One analyst, Bob Litterman, who used to be the chief of risk management at Goldman Sachs, commented that Exxon is taking unjustified risks by focusing on large-scale projects in expensive areas, such as oil sands, the Arctic, and deepwater deposits, while there is cheap oil supply coming to the market from elsewhere.
Truth be told, Exxon has put its Arctic ambitions on hold, exiting Canada’s Arctic projects last year and now being forced to stay out of the Russian Arctic, where it partnered with Rosneft, because of the U.S. and EU sanctions against the energy business of the country.
The company is even considering action with regard to climate change as it becomes increasingly aware that some of its large shareholders are expecting this, in addition to the regular flow of dividends. By Irina Slav.
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Oil dividends!?! What will the Texas aristocrats do when that is cut off?
Go to the barricades? Frack under their own houses?
Go down to the country club and ask to get an extension on their membership? Stop paying on their Cancun time share ? Move the family to Qatar?
This IS the real existential threat to the yahoos who have been running this empire into the ground since they put Johnson into the White House after that fateful day…… in Dallas back in ’63.
I much prefer fairy-dust power anyway.
Didn’t saw them complaining when they were making bank during the $100+ per barrel days, so why should we even give them sympathy now.
Going to need to invest in more war until oil prices recover!
One of ExxonMobil’s (XOM) best breadwinner has long been their downstream business, meaning their refineries.
Problem is everywhere one looks, we have a glut in refining. In the US the situation is stable, but most Gulf Coast refineries run a steady surplus of various products, chief among which is Ultra Low Sulfur Diesel (ULSD), the prime mover of all advanced economies as it’s used in everything, from lorries to industrial generators. Gulf Coast producers, among which XOM is a prime player, have long dealt with the problem by “dumping” their excess ULSD on the European market.
Problem is Europe has such a glut it has been bleeding refining capacity all over the place for five years already: refineries have been steadily shut down, repurposed or have seen their capacity reduced. In short the ARA (Amsterdam-Rotterdam-Antwerp) storage facilities are bursting to the seams and prices are nowhere near as good as they used to be.
That leaves Asia. But the boom in Chinese exports of refined products hints even that market may be already saturated.
To compound XOM’s difficulties it has long been company policy to invest in maxi refineries (>300,000 bbl/d) either alone (Singapore, Antwerp, Baytown etc) or in partnerships (Kawasaki, Yanbu etc) to the detriment of smaller projects.
Now: the trend across Asia has been towards monster refineries patterned after Iran’s Abadan refinery, able to process over half a million barrels per day. A typical example the al-Zour refinery in Kuwait, which will start operations in 2019 and will have a capacity of over 600,000 bbl/d, replacing the Shuaiba refinery (200,000 bbl/d).
Only one country has been immune: China. And I find it really intriguing.
Anyway, XOM has already a healthy presence in Asia which it will be extremely difficult to increase, both because peak oil demand is far closer than any oil company would like to admit and because some Asian markets, starting from China, are effectively off-limits to foreign companies.
It will be extremely difficult to generate further growth in refining, not just for XOM, and present oil prices seem more inflation and speculation driven than influenced by demand and supply.
In short, while I would be ready and willing to invest in XOM middle term (maximum a decade), provided shares fall again under $70, I wouldn’t bet on it long term.
Exxon is Exxon, and EVs are unsuitable for a mass audience at present until our scientists discover an alternative to thin film lithium ion batteries. As it is, a teslas battery costs nearly 20k, with 150 dollars of that cost due to the puny mass of lithium in that battery. There’s a good article on SA about the subject.
But once we have those batteries (current technology is TEN TIMES below limits of maximum energy density), big oil will be relegated to making plastics. Maybe not even that. Not a good long term investment imho..
“A recent report from the Institute for Energy Economics and Financial Analysis, however, warned that Exxon is suffering from fundamental weaknesses in its financials, which could spell an “irreversible decline” for the world’s top public E&P.”
Oil production is typically a large capex endeavor. Large projects take years to come online. Hence why oil goes through boom and bust cycles. Many readers tend to mock the ‘this time it’s different’ approach when it comes to economic cycles so it’s interesting some think differently when it comds to commodity prices.
“END OF THE U.S. MAJOR OIL INDUSTRY ERA: Big Trouble At ExxonMobil”