When ExxonMobil Talks, People Should Listen

No matter what you might think about ExxonMobil’s product, you should take a hard look at their business results and recognize that the company is very good at what it does. The people in charge there look far into the future and deep into the past. They know their product, they understand the market, and they consistently deliver exceptional cash flow and profit results. With the exception of a very well-publicized incident apparently caused by an individual human error – it is not hard to believe that a man who is drinking can make dangerous decisions in a maritime environment – the company also has a stellar record of competent operations in a very demanding and dangerous business.

There are many people in and around the energy business who are full of uncertainty these days; they simply have no idea what to do with the information overload that they have received during the roller coaster of the past couple of years with regard to future price and demand signals. Will prices climb steadily, explode upward, fall off of a cliff, or slowly decline. Will the world remain in a long term recession, or will all of the money being pumped into the system result in another dramatic round of new growth? Have oil production rates peaked, or is there still enough new supply in enough easy to reach locations that we can produce significantly more barrels per year than we ever have in the past?

ExxonMobil is pretty sure that it knows how it wants to invest its rather enormous and still growing pot of cash.

Emboldened by its financial strength in a faltering economy, Exxon is stepping forward to take a more prominent role in the suddenly revived political fight over opening federal land to drilling. Kenneth Cohen, Exxon’s vice president in charge of public affairs and lobbying, urged the U.S. government Friday to open all offshore areas, as well as federal lands in Alaska and the Rocky Mountains.

He argued the move would create 160,000 jobs and generate $1.7 trillion in government revenue over two decades, citing a study commissioned by the American Petroleum Institute, an oil industry trade group. “We can do this in an environmentally safe way,” Mr. Cohen said.

Just in case you need a translation, ExxonMobil, a company that can trace its corporate roots back more than 100 years and can show a record of success in a variety of economic times, wants to keep drilling and producing oil. They recognize its value and know that nothing currently on the table by way of efficiency improvements or renewable energy programs is going to change that. Chevron, another company with a long corporate history, apparently agrees:

Mr. O’Reilly (Chevron CEO) told investors Friday that his company had hoarded cash and reduced debt to prepare itself for the downturn in pricing. Now, he said, with costs falling and competitors struggling, Chevron plans to use its financial flexibility to pursue new initiatives.

“We’ve seen costs come down quite a bit faster than we have in the past, which tells you that we could be hitting the sweet spots here for some of these projects,” said Mr. O’Reilly.

Here is another translation for you – the “sweet spot” for any commodity producer is when costs are going down while prices are going up and competitors are falling behind.

P.S. In case you do not know me very well, I am not saying that I believe that a massive new effort to produce oil is in the best interests of American or even world consumers. What is good for commodity producers and their investors is not always good for all of the rest of us.