It’s hardly news that many of the major oil and gas producers are struggling to keep up with production in the face of dwindling supplies from legacy wells. That’s a huge issue, especially as energy prices continue to surge. Churning out consistent amounts of crude oil equivalents is the lifeblood of the industry.
One of the biggest offenders in this realm has been Dow component and energy king-pin Exxon Mobil (NYSE:XOM). Despite its enviable position as one of the largest energy producers on the planet, Exxon recently posted its sixth straight quarter of production declines, representing the longest such streak in more than 13 years. Scarier still, the company estimates that those production declines will continue on through 2013.
Over the past ten years, Exxon has replaced just 106% of production organically and only 120% if you include acquisitions and disposals. A huge contributor of that was its $41 billion buy of XTO back in 2009. Without it, 2010 would have seen a replacement ratio of a measly 61%.
Still, the 120% metric is still inadequate to increase output sustainably. Exxon would need reserve replacement of around 127% in order to keep its measure of proved reserves to production steady. In fact, Exxon actually ended 2012 with fewer proved oil reserves then it had back in 2003. Meanwhile, the firm’s output was only slightly higher and more than half of it was natural gas.
Still, don’t let a short-term problem cloud a great long-term investment.
The Short Term Looks Shaky
Exxon’s XTO purchase was indeed forward-looking in nature, as it gave Exxon North America’s natural gas crown at a time when fracking wasn’t part of the energy lexicon just yet. Still, many of Exxon’s long-term moves have been costly in the short term. Production at the integrated giant continues to slip as many of its latest projects have yet to begin pumping out commercial levels of production.
Last year, Exxon’s oil and gas production fell 6% to average 4.2 million barrels of oil equivalent per day. This year Exxon Mobil expects its production to continue to decline by about 1% due to weaker output of natural gas. Natural gas prices still remain in the basement and many producers of the fuel have curtailed its production.
In the short run, Exxon has fallen behind many of major rivals. Chevron’s projected production growth is 2.7% this year, while others like ENI (NYSE:E) and Total (NYSE:TOT) have reserve replacement ratios north of 140%.
… But the Long Term Looks Fine
Still, when things do get better, it will be solid for shareholders. While Exxon has more than 28 major oil and gas projects — including around 24 linked to oil and liquids products — set to start pumping between 2013 and 2017, the company will ultimately grow its reserves and production by opening up its wallet.
In fact, the giant recently announced plans to invest about $190 billion in CAPEX spending over the next five years on new exploration and development opportunities. According to Exxon, that money will be put to use by the firm to more than double its exploration acreage in a range of proven and emerging locations. The company has earmarked $41 billion — including $3 billion for its purchase of Celtic Energy — to be spent this year alone.
The key to that statement is the “proven reserves” part. See, that means barring any huge oil gushers in the emerging acreage — which could happen — it may soon be considering another deal like XTO shortly here in the future. Considering that this is Exxon we are talking about, the firepower is there to for some big buys to happen. Firms with hefty market-caps like Anadarko (NYSE:APC), EOG (NYSE:EOG) or Continental Resources (NYSE:CLR) could all be on the giant’s radar. Any of those deals would put some serious proven reserves into its arsenal and move the needle at the integrated giant.
The Bottom Line
All in all, in the long-term, things will be just fine for Exxon. And while it’s always fun to speculate on buy-outs, the best buy in this situation is still Exxon itself.
Right now, shares are trading for just under 11 times 2013’s earnings. That’s roughly in line with U.S. competitors like Conoco (NYSE:COP) or Chevron (NYSE:CVX) but, given Exxon’s size, firepower and huge cash flows, it’s really a discount. Just consider the kind of deals that it can undertake versus some of its rivals.
The bottom line is? While production may be slipping today, the longer term will see Exxon back on top — even if it has buy its way there.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.