Introduction
Today’s column wraps-up my evaluation of whether the assertion can be plausibly sustained that Guyana’s rapidly emergent oil and gas sector has dramatically improved the fortunes of ExxonMobil going forward. An improvement in fortunes is defined by me to include both: 1) a turnaround away from the corporation’s growing indebtedness and zombification, as well as 2) other deformations generally associated with this corporation. Indeed, the latter mentioned deformations will be directly discussed in next week’s column. There the case is made for classifying ExxonMobil as a Zombie+ corporation.
For the purposes of my wrap-up of last week’s column, as indicated above, I start with the third stage in last week’s presentation, which because of space was not fully completed. To recall, I left undone coverage of ExxonMobil’s income opportunity as only Guyana’s income opportunity was covered last week. After that, I turn attention to Stage 4 of the analysis, which deals with risks facing the model.
Stage 3: ExxonMobil Opportunity
Ever since Guyana’s First Oil in December 2019, ExxonMobil has focused on growing these newly discovered upstream assets. The company’s original plan was for their earnings to grow to about US$30 billion by 2025. Originally, the company was assuming US$60 per barrel Brent for Guyana crude. Since then, oil prices have risen enormously, peaking at US140 per barrel since the Russia/Ukraine war. Immediately preceding the impact of this war, Brent price hovered around US$83 per barrel, which the stock analyst [The Value Portfolio] has also used. This price was US$23 per barrel higher than the corporation’s target price. Given its 2025 projected production [ barrels per day] this means that if crude oil prices rise by 2025, earnings could be billions of dollars higher. Already earnings for Q1 2022 could annualize substantially higher this year.
ExxonMobil is, therefore, likely going to generate large increases in cash earnings and therefore to shareholder returns. The company has already for Q1 2022 significantly improved its debt load and has put forward proposals for improving these. Remember a company debt of US 60 billion is costing it about US$2-3 billion in annual interest charges. With that earnings strength, the company’s net debt is manageable, especially with the potential of further reductions going forward. As the stock analyst, The Value Portfolio reminds, ExxonMobil with a 5% dividend yield has recently guided share repurchases of $10 billion over the next 12-24 months. At current crude oil prices, the company could be both earning roughly 10 percent for shareholders as well as having roughly US$10 billion left over. This highlights the present strength of ExxonMobil’s overall portfolio.
Stage 4: Thesis Risk
One thing above all, which this years-long running series of columns on Guyana’s oil and gas sector should have made abundantly clear is that the sector’s performance is fraught with risks and uncertainty [as commonly defined in business], whether internal to the corporation or external to it. Such risks include any factor that can lower its profits or worse, lead to firm failure. These factors cover the capability of management, economic changes positive and negative (market demand and supply); environmental; geo-political; inter-state conflicts and war; accidents; socio-political confrontations and challenges. All these are going to affect the assessment offered below, but three of these I single out for special mention here.
First, the Venezuela border dispute stands out because it is a terminal risk (discussed before) Second, available information reveals that the corporation is still betting heavily on continued significant growth in exploration finds within Guyana. The expectation is for a doubling in present reserves holdings. Obviously, despite a record creaming rate of wells drilled to reserve finds there is no guarantee for expected additional reserves. Third, the assumption is that oil prices will stay at the target level. This is patently not assured.
Assessment
The thesis advanced in last week’s column and continued to be explored today, is that, Guyana’s emergent oil and gas sector has contributed, substantially, to say the very least, to the improved fortunes of ExxonMobil. Formally, the thesis has been elaborated in four stages. Briefly, Stage 1 relied on ExxonMobil’s announcements and specifically its guidance, based on its proven reserves. These are provided in its Investors Presentation. This lays out its longer-term plans for 10 Floating Platforms for Storage and Offloading, FPSOs, producing around a million barrels per day. Stage 2 evaluates these assets against Guyana’s proven geologic petroleum resources. Stage 3 assesses the income opportunity for Guyana and Exxon Mobil separately. Finally, Stage 4 assesses overall risks.
The Value Portfolio arrives at the following assessment:
“Every so often companies arrive at “company maker” discoveries, products, etc. Guyana has the potential to be a “company maker” for ExxonMobil, especially with current prices >$80 / barrel Brent. The Guyana basin reasonably has the potential to earn tens of billions. Margins at current Brent prices are a massive $55 / barrel showing the portfolio’s strength”
Acknowledging the risks as highlighted above. I share this assessment of ExxonMobil’s likely turnaround away from growing indebtedness and zombification as these relate to contributions by Guyana’s emergent oil and gas sector to this outcome.
Conclusion
I had intended in this column to deal at some length with widely reported deformations of Exxon Mobil, apart from its heavy indebtedness and zombie status as defined in business, finance and economics. Space does not allow me this opportunity so I shall undertake this task starting in next week’s column.
