Winners From Exxon’s Supersized Capex

by Aaron Levitt | March 13, 2012 10:59 am

As new energy sources continue to get harder to find, many of the major integrated oil firms have been unveiling mammoth-sized capital expenditure budgets.

Back in December, Chevron (NYSE:CVX[1]) set the bar for the large oil firms, when it announced its 2012 capex budget would be around $32.7 billion. Likewise, Royal Dutch Shell (NYSE:RDS.A[2],RDS.B[3]) revealed that it will spend a similar high amount[4]. All across the E&P spectrum, a variety of firms have been upping their budgets as the hunt for oil continues to get more and more expensive.

However, the king of the capex hill has to be Exxon Mobil (NYSE:XOM[5]). With the giant predicting that overall energy demand will rise 30% by 2040, it recently set forth its five-year budget at an unprecedented $185 billion[6]. That’s a 29% increase versus the previous five-year period.

Given the planet’s new energy reality, this sort of high spending certainly is justified and ultimately will benefit the oil firm and its shareholders over the long term. Nevertheless, Exxon shareholders won’t be the only ones to see gains from huge increase in spending. After all, the integrated company will need to hire out all sorts of subcontractors and dole out these funds accordingly. For investors, adding these various service firms could be just as profitable as adding the integrated oils themselves.

Essential Equipment

Overall, Exxon’s plans tap some unique resources[7] like Africa, Papua New Guinea and North American shale formations with its latest capital expenditure budget. About $150 billion of its future spending will go toward these exploration efforts. The remaining $35 billion is earmarked for upgrading its global refining and chemical operations. This includes major initiatives in emerging Asia, such as a massive expansion at a Singapore chemicals facility and a new refinery in Thailand. While these facility upgrades might excite shareholders in companies like Foster Wheeler (NASDAQ:FWLT[8]), its E&P efforts are what gets my blood pumping.

Exxon’s upgraded capital expenditure program would cover 21 major oil and gas projects currently in development and would add just more than 1 million net barrels of oil equivalent per day by 2016. Getting that amount of production out of the ground takes some serious equipment. This is exactly why investors should consider adding the oil service industry to a portfolio. As Exxon and the rest of the E&P sector continue to delve into more unconventional fields like Canada’s rich bitumen oil sands or Kenya’s hard shale formations, the task will fall to the service firms to provide the muscle required to drill in these places.

What’s more bullish for the oil services firms is the fact that oil and gas production has been dwindling despite these spending amounts. The explorers are finding it harder to maintain a sound production growth profile, given the challenges with these sorts of new fields. A variety of majors including BP (NYSE:BP[9]) recently have announced struggling production growth and reported producing less oil last year. Exxon predicts its own production could fall by 3% this year[10] when compared with 2011’s numbers. This underscores one of the major problems the E&P firms are having: spending a ton while only receiving only marginal benefits.

Playing the Benefactors

Given the bullish trend toward higher capex spending by the major oil firms, the long-term picture is rosy for the oil service industry. Exxon’s latest budget is testament to the dollar amounts that firms must spend if they want to stay in business.

The SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:XES[11]) continues to be my favorite way to access the sector. The fund uses an equal weight strategy to track 44 different “pick-n-shovel” plays with the oil services industry. Top holdings for the fund include offshore vessel operator Tidewater (NYSE:TDW[12]) and driller Transocean (NYSE:RIG[13]).

The fund also gets the nod in the expense and return department, costing less (0.35%) and producing better returns than its larger market cap-weighted rival, the iShares Dow Jones US Oil Equipment Index (NYSE:IEZ[14]). The fund provides investors a wide play on the trend of increasing capex spending and could be a good starting point.

Those looking to piggy-back directly on Exxon’s huge budget might want to go with venerable oil service stock Halliburton (NYSE:HAL[15]). Exxon’s purchase of XTO gave it access to a plethora of shale assets, and in the face of lower natural gas prices, the firm is moving toward boosting production of natural gas liquids (NGL) and shale oil. Halliburton will be a direct beneficiary of that shift. Generally, when a big company needs something done, it often will go to another big company to fill that need. Halliburton’s leadership position in North America makes it the ideal partner for Exxon across a variety of projects. The oil services stock’s 1,000 HP fracking pumps are the industry standard when tapping into hard shale rock, regardless of fuel type.

Halliburton shares are cheap too. Like BP, the firm is suffering from a “Macondo Hangover.” However, unlike BP[16], much of the service firm’s legal responsibility has been expunged, and the chance of a huge payout seems unlikely.

Shares of Halliburton can be had for a cheap P/E of 11 and currently sit about $23 below their 52-week high. That could be a huge bargain as Exxon and other E&P firms most likely will choose the oil service giant as their partner on a variety of projects.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  2. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  3. RDS.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.B
  4. it will spend a similar high amount: http://investorplace.com/2012/02/royal-dutch-shell-capex-will-pay-off-rdsa-rdsb-dividends/
  5. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  6. at an unprecedented $185 billion: http://investorplace.com/2012/03/exxons-massive-spending-plan-looks-right-on-the-money/
  7. tap some unique resources: http://finance.yahoo.com/news/exxonmobil-plans-five-investment-185-140000930.html
  8. FWLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=FWLT
  9. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  10. its own production could fall by 3% this year: http://online.wsj.com/article/AP698226701140440a9bacb32b14c48966.html
  11. XES: http://studio-5.financialcontent.com/investplace/quote?Symbol=XES
  12. TDW: http://studio-5.financialcontent.com/investplace/quote?Symbol=TDW
  13. RIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIG
  14. IEZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=IEZ
  15. HAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAL
  16. unlike BP: http://investorplace.com/2012/03/is-bp-back-only-partly/

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