Introduction
A month ago, in my February 13 column, I had readily acknowledged my strong support for the widely expressed judgment that “ExxonMobil in the second half of the 2010s and certainly all of 2020, had become a classic zombie firm, as that term is defined… in business, finance and economics” I used the preceding month to evaluate whether a turnaround away from this zombie status was likely; beginning in Q4 2021.
Today’s column turns to explore the role analysts of ExxonMobil stock and those focusing on the emergence of Guyana’s oil and gas sector project the latter’s role in a scenario where there is a turnaround of the former’s fortunes. In this regard, I believe that the stock analyst firm The Value Portfolio provides a convincing argument on this matter, while espousing strong support of XOM stock.
I refer here to two specific articles published in Seeking Alpha. The first is quite recent, and is challengingly entitled “ExxonMobil’s Guyana Business is a Company Maker” [January 8, 2022]. The second is more brightly entitled “How to Invest in the Next Wealthiest Country in the World” [January 10, 2020]. Additionally, the approach of this analyst affords me a good opportunity five years later to update my initial estimation of Guyana’s likely petroleum finds.
The approach used by The Value Portfolio is straightforward. Conveniently, it can be broken down into four broad stages. The first of these relies on ExxonMobil proven petroleum reserves data as assembled in its Inves-tors Presentation, where Guyana’s reserves holdings are specifically identified. Second, Guyana’s upstream geologic petroleum resource potential is estimated. Third, using these two sets of data the income/revenue opportunities for Guyana and ExxonMobil are broadly projected. Finally, the risks attached to such estimations are clearly identified
Stage 1: ExxonMobil’s Guyana Asset Overview
The study referenced above acknowledges that, currently, ExxonMobil’s proven reserves are estimated at 10+ billion barrels of oil equivalent [boe] located offshore as stated in its Investor Presentation. These discoveries are based on successful 3D seismic data and drilling. Potential reservoirs, averaging roughly 500 million barrels each, have been discovered. Indeed, ExxonMobil boasts of achieving a >90% success rate for drilling! It is claimed that recent discoveries have successfully tested the thesis that further discoveries lie beneath previously identified resources. Company drilling in both other basins and the remainder of the Stabroek Block therefore continues. These attainments underscore the world-class strength of Guyana assets. [See Clive Thomas, Guyana and the Advent of World-Class Petroleum Finds]
Of equal significance, ExxonMobil’s Investors Presentation reveals the corporation plans to grow Guyana’s crude oil production capacity to 1.3 million boe per day by 2027. This volume will utilize six floating platforms for storage of oil [FPSOs] Each FPSO is expected to handle about four billion barrels. That therefore implies about 700 million barrels per FPSO with a reserve life of a decade. The company declares it is aiming at 10 FPSOs at peak output level. The Value Portfolio has lavished much praise on the company’s “design-one” “build-many” approach for generating strong efficiencies, with $35 / barrel breakeven (Brent) for Liza Phase 1 and $25 / barrel breakeven (Brent) for Liza Phase 2. Payara is expected to have breakeven at $32 / barrel and Yellowtail is expected to be at $29 / barrel for investors.
Stage 2: Resource Potential
Guyana has significant long-term oil and gas resources potential. When I had made a guestimate of 13-15 billion barrels boe back in 2016, I was accused at the time of reckless exaggeration. I had been careful, however, to indicate the two sources responsible for my conviction; namely, 1] the “Atlantic mirror- image geological principle”, which explains the formation of Africa and South America out of one land mass, over immemorial time, and 2] two US Geological Services, USGS, Fact Sheets that offer an Assessment of Oil and Gas – Undiscovered Fully Risked Guyana-Suriname Basin, published in 2000 and 2012.
I am certain that my initial estimate [13-15 billion boe] will turn out to be conservative. Similarly, a revised estimate will fall outside of ExxonMobil’s initial guidance to investors. Indeed, ExxonMobil’s recent Investors Presentation states that the present massive Guyana resources coming from roughly 10-15 drilled wells has twice as many undrilled prospects. Further, the company’s own estimate for its final basin resources is more likely >2x its current discoveries and more in the region of 25 billion boe. That suggests a 30-40-year reserve life at 2.1 million boe per day /by the early-2030s, when one expects total production to range between 2.1 million boe to 3.5 million boe
Stage 3: Income Potential
The stock analyst posits that with a Brent price of US$80 per barrel and a breakeven of US$28 / barrel, Guyana has potential margins of roughly US$52 / barrel. These incredible margins show the asset’s strength, its low cost, and the strength of ExxonMobil’s “design one, build many” approach to its FPSOs, lowering capital cost.
Based on a 2.1 to 3.5 million barrel/day production range, total basin profit ranges from US$42.2 billion to US$70.3 billion, implying that the basin’s profits can give the company a P/E of 8 to 14 by itself alone (when adjusting for the fact that ExxonMobil has a 45% stake in the Stabroek block). This highlights how the asset could be a “company maker” on its own.
Conclusion
Next week I wrap-up this presentation on whether Guyana’s emergent oil and gas sector is driving the turnaround in ExxonMobil’s fortunes.
