Exxon: Get In Before Natural Gas Rises
Exxon Mobil (XOM) CEO Rex Tillerson has indicated that the natural gas boom in the U.S. could boost the global economy. Tillerson said that “natural gas is quickly becoming a key enabler of economic growth and environmental progress around the world,” with demand in Asia set to rise by over 50% in the next 30 years. In separate remarks, Royal Dutch Shell (RDS.A) CEO Peter Voser agreed, stating that gas reserves are assisting in the U.S. economy’s recovery. I am not sold on the idea that natural gas development is the solution to the worldwide economy’s woes, but I do think that natural gas is the ticket that Exxon Mobil will use to break past $90 by this time next year.
Tillerson Predicts the Future of Natural Gas
Tillerson believes natural gas will continue to displace coal as a primary energy source for electricity production in the years to come. His remarks came amid discussion of whether Exxon Mobil’s acquisition of XTO Energy in 2010 was a wise strategy. In my opinion, it was. Though natural gas prices will take time to rise to normal levels, Exxon Mobil purchased itself the title of the U.S.’ largest natural gas producer, a position that would have taken years to build from the ground. This is key since fracking technology continues to improve, and latecomers are suffering from a lack of knowledge and resources as well as increased land prices. The acquisition also supports Exxon Mobil’s petrochemicals arm, which continues to contribute to its bottom line.
Tillerson was instrumental in the purchase of XTO. Tillerson has decades of experience in hydraulic fracturing stretching back to the mid-1970s, and under his leadership Exxon Mobil is consistently reporting record annual sales, not just of oil, but natural gas. Additionally, by keeping most of XTO’s key staff on board, Tillerson masterminded one of the smoothest super-mergers in corporate history, all to the benefit of Exxon Mobil’s position in the industry.
Based in part on its acquisition of XTO, Exxon Mobil has been preparing to expand its Baytown, Texas petrochemical complex, looking ahead to potential “significantly increased exports.” As part of this plan, Tillerson stated that the company is studying the Gulf Coast and Canada as potential launching points for its exports. Such a move may be years away, but I think it shows Tillerson’s foresight – just as the acquisition of XTO did, when it seemed strange for a primary oil producer like Exxon Mobil to snap up a natural gas leader. However, as Tillerson said, Exxon Mobil “can afford to wait.”
A CEO That Earns His Keep
Recently, at Exxon Mobil’s annual shareholder’s meeting, a proposal to amend the executive pay program, which awards Tillerson with a considerable increase, was approved by shareholders with 78% in favor. Though the proposal passed, certain shareholders noted that Exxon Mobil executives are far from the lowest-paid in the industry, and Tillerson ranked 16th among CEOs of publicly-traded U.S. companies last year. I think that Tillerson earned his compensation, and shareholders appear to share that faith as they also voted against a proposal to split the chairman and CEO roles. Chevron (CVX) shareholders and Anadarko (APC) shareholders faced similar proposals, which they also rejected.
I think these votes are interesting given the scrutiny that Chesapeake (CHK) CEO Aubrey McClendon is undergoing. Last month, Chesapeake’s board announced that McClendon would be stripped of his position as Chairman of the Board once a suitable replacement is found, and the Board also just announced that it is conceding to investor demands to suggest replacements for certain directors. Though Chesapeake is not in the same league as Exxon Mobil and Chevron (and I don’t think for a moment it ever will be), it is much more in the public eye these days and analysts were watching the supermajors to see if Chesapeake’s troubles inaugurated a “shareholder spring” against executive management. The votes noted above show that Chesapeake is largely on its own.
Mexico the New Hot Play?
Under what is being called a “new contract regime”, Mexico and state-owned Petroleos Mexicanos, or Pemex, are looking to attract outside investment. Exxon Mobil might be one of the players interested in looking at Mexico for exploration and production. Already, Chevron is considering developing mature oilfields in offshore Mexico in the Arenque block at auction. Mexico nationalized all oil and gas assets in the late 1930s, including those from Chevron and Exxon Mobil, but the first signs of an opening came late last year when U.K.-based Petrofac Ltd was awarded two oilfield operating contracts.
Mexico is particularly interested in attracting operators to deepwater investments. According to a 2009 report by Forbes, Pemex is responsible for 40% of Mexico’s budget, but years of extracting from easy opportunities at the expense of developing new technical and resource capabilities leaves Pemex stranded and dependent on outside investment to move forward. Mexico also has shale gas reserves estimated between 150 and 680 tcf, the fourth largest in the world. This would be of particular interest to Exxon Mobil given its proposal to explore natural gas exports from the U.S.
Though the Mexican government and Pemex are encouraging investment, there is a concern for companies considering the move. Article 27 of Mexico’s Constitution indicates that all land and water could be owned by the Nation of Mexico, and the State may make expropriations or take other actions against private property whenever it is in the public utility or interest.
In my opinion, this is one of the loosest interpretations of private property in any country in the free world, and though Mexico’s Constitution also makes it clear that the State’s claims on private property can be relaxed in the event of “concessions”, I think energy producers will be very nervous about investing in Mexico. It was the language of Article 27 that allowed Mexico to nationalize producers’ assets in the 1930s. Exxon Mobil is still suffering from the blow caused by Venezuela’s 2007 nationalization of its assets, but it is not outside of Exxon Mobil’s power to extract written guarantees from the Mexican government.
Outlook
Though Exxon Mobil can be patient with its natural gas development, it is continuing to take aggressive moves with its oil development. Recently, the company won approval to develop the Hebron heavy oil field off the coast of Newfoundland, Canada, which is estimated to hold over 700 mboe. It is developing the field in a joint venture with Chevron, Suncor Energy (SU), and Statoil (STO).
Exxon Mobil is looking financially healthy and reasonably priced compared to its peer group, trading around $83 with a price to book ratio of 2.53, and a forward price to earnings of 9.76. Chevron is trading around $101 with a price to book of 1.63 and a forward price to earnings of 7.86, Marathon Oil (MRO) is trading around $24 with a price to book of 1.0 and a forward price to earnings of 6.25, and BP (BP) is trading around $38 with a price to book of 1.07 and a forward price to earnings of 6.51.
Though Exxon Mobil’s ratios are higher than average, I think it is due to investor confidence in Tillerson’s guidance and the company’s direction. I think Exxon Mobil is one of the healthiest supermajors at the moment, and with a 2.9% dividend, investors are well rewarded for the premium its stock commands.
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