Friday, March 21, 2008

Will Exxon Produce More Oil? Probably Not

The question for Exxon Mobil (NYSE: XOM) isn't whether they're able to produce more oil, rather it's whether they are willing to. I think the answer is they're not willing to, and will maintain their production at about where it's at today over the next few years.

Exxon Chairman Rex Tillerson, at a March meeting with analysts, responding to the question of why the company wasn't looking to generate more growth through 2012.

Tillerson said, "We don't start with a volume target and then work backwards, it really goes back to what is an acceptable investment return for us."

That's another way of saying that increasing production for the sole purpose of causing oil prices to decrease isn't a good way of doing business. This solid way of doing business is one of the reasons the company led a very profitable industry with a return on capital of 32 percent.

This is music to shareholders ears, as that, along with the buyback of company shares, has resulted in less shares available to the public, and more barrels distributed per share for Exxon shareholders. Tillerson said that the buybacks have resulted in shareholders enjoying a 20 percent increase in their portion of the oil production of the company.

Another question to consider is whether Exxon is able to produce more. This must be asked because their production in decreasing by a large amount in its European and U.S. regions, dropping by a huge 37 percent since 2000. That equals approxmately 500,000 barrels less a day now, than it did that short time ago.

The problems in Venezuela stealing the business away from Exxon through Hugo Chavez nationalizing the fields, as well as the specific deals made with some foreign countries, where Exxon puts up the investment capital, and is paid back in barrels of oil. Once oil prices increase to a certain level, Exxon gets less of the barrels. The obvious ramifications of the current price of oil speaks for itself: Exxon has lost a lot of barrels there.

Even so, over the next four years, Exxon will bring new fields into the fold in Africa, Russia and the Middle East. While they could conceivably increase output above the losses mentioned before, they're choosing to grow at a rate that basically replaces existing losses, rather than increase production.

This looks like a good plan to me, and shareholders should reap the benefits for years to come.

No comments:

Post a Comment