I have a number of acquaintances who either work or have worked for ExxonMobil. Most of those ExxonMobil employees were people I met at the Naval Academy or at alumni functions. They are some of the brightest and numerically competent people I have ever met.
When looking at objective measures like revenues, return on investment, and net profit figures, it is also hard to argue with ExxonMobil’s record of success in a very challenging business. A couple of days ago, I posted a comparison between quarterly reports for Areva and Royal Dutch Shell, here is one that includes revenue and net profit for Royal Dutch Shell and ExxonMobil with a reference comparison of revenue posted by Areva.
As you may notice, ExxonMobil’s net profits are twice as high as Royal Dutch Shell’s, even though its revenue is only 6% higher.
With that background, you might understand why I consider statements by ExxonMobil’s executives about the future of energy to be worth my attention. Yesterday, the New York Times Green blog published a short post titled A Big Bet on Natural Gas that included an explanation of why the company has invested so heavily in natural gas production and transportation infrastructure during the past year or two.
Exxon Mobil spent $41 billion a year ago to acquire XTO Energy, doubling its natural gas reserves. And it is building up a massive liquefied natural gas capacity around the globe. Too bad for Exxon Mobil that a gas glut in the United States and elsewhere is causing gas prices to tank, and a boom in shale drilling promises moderate prices for years to come.
Those investments have contributed to a lengthy period of unimpressive stock price performance; many investors are convinced that natural gas prices are going to remain low for the foreseeable future. They do not understand why a company that is investing so much money in additional capacity for producing that fuel would be worth their time and money. ExxonMobil decision makers, in contrast, have been investing heavily in XOM stock, with an aggressive stock repurchasing program that has reduced the total number of shares outstanding by 11% since the end of 2006.
Some stock repurchase programs can be seen as attempts by management to keep their stock prices up and earn bonuses not supported by actual performance measures, but I believe that ExxonMobil decision makers are buying stock because they think it is a good investment. There is good reason to believe that the company is investing in natural gas production and distribution capacity because they think that is also a good investment that will pay large dividends in a future where natural gas prices increase more rapidly than other analysts and competitors expect.
Here is a quote from William M. Colton, ExxonMobil’s vice president for corporate strategic planning, that should be read very carefully.
“Everyone likes to talk about oil and transportation because people all drive cars and they like to talk about them. But in energy, its power generation where the big action is. For the big power generation needs of the country, you are really going to need a choice between coal, gas and nuclear.
“While nuclear has an important role to play, you can’t do that fast. And then you have that power generation C.E.O. sitting there, and thinking, for my next big plant should I make it gas or coal? Well, it’s pretty easy if you think there is going to be any risk of a carbon cost, with natural gas being 60 percent cleaner, gas just makes sense.”
There is more information that is worth reading at A Big Bet on Natural Gas, but I want to you go and read it there. One thing I want you to consider is the fact that ExxonMobil has spent enough money since 2002 buying its own stock to have paid cash for 10-20 new nuclear power plants.
Mr. Colton’s statement qualifies as a smoking gun of the “damning with faint praise” genre. I also think it qualifies as the kind of smiling advice you might get from a blackjack dealer who says – “House stands”.
Disclosure: I have recently bet with the house and more than doubled my holdings of Chesapeake Energy. That is my favorite choice of companies that will gain a substantial benefit when natural gas prices in the US increase. I am betting that result is inevitable as power generation company decision makers use currently low prices as a reason build power plants that can only burn gas or even more expensive fuel oil. Many electricity production companies believe they are adequately protected from future fuel fuel price risk by favorable fuel adjustment surcharge rules.