Exxon Stock – XOM Hits A Major Snag

Things were looking up for integrated energy behemoth Exxon Mobil (XOM) this year.

exxon stock, xomThe energy stock seemed to finally get a grasp on its production woes as several major new projects were getting to the commercial stage. The critical “oil cut” was rising. And even the firm’s refinery issues seemed to be waning. Those traits helped XOM find several major hedge fund and institutional backers — including everyone’s favorite bespectacled value investor, Warren Buffett.

All in all, Exxon stock seemed to break free from its underperformance curse.

Unfortunately for Exxon, the sanctions in Russia have finally hit home. One of the ambitious projects propelling XOM forward may soon become a major headache on the profits and costs front. While it isn’t enough of a reason to dump Exxon stock, investors in Exxon may soon have to deal with a stagnating share price.

A Stoppage of Work For Exxon

One of XOM’s most ambitious projects to date was its Russian Arctic drilling project. The 2012 partnership with Russia’s Rosneft (RNFTF) called for investment of up to $500 billion dollars and provided Exxon with access to an estimated 90 billion barrels of oil equivalent (BOE) in the Arctic Ocean and the Black Sea. The project began to drill its first wells in the Kara Sea in early 2014. Full-scale production from the region was estimated to begin around 2027 after all the necessary sub-sea infrastructure was installed.

The partnership was a thing of beauty. Rosneft gained access to some of Exxon’s fields in North America, as well as technological know-how to begin fracking and drilling offshore to tackle Russia’s vast unconventional fields. On the flipside, XOM gain access to some a plethora of oily reserves. And considering that — like many of the large integrated giants — it was facing a production crunch, those 90 billion barrels plus of crude oil were seen as godsend for the Exxon stock.

Unfortunately, Vladimir Putin decided to essentially invade the Ukraine.

As the Ukraine Crisis has intensified, both the United States and Europe have turned the screws tighter and tighter on Russia, including a whole host of economic sanctions targeting Russian businesses and its oligarchs. The first round of energy sanctions banned technology transfers that applied to Arctic and Kara Sea. Several loopholes in these laws allowed for Exxon to begin drilling with a rig that was already in place before the sanctions were created.

Well, the latest round of sanctions launched on September 12th directly take care of the loopholes that allowed XOM to begin operating.

According to the latest rules, E.U. and U.S. companies are forbidden from helping Russia extract any oil from Arctic, shale or offshore fields — which is exactly what XOM is trying to do. As a result, Exxon, Rosneft and rig owner SeaDrill (SDRL) will have until September 26th to cement and stop drilling at the Universitetskaya-1 test well. This test well is estimated to have cost Exxon around $700 million to drill. After the well is sealed, no further work is permitted by XOM in the Russian Arctic.

Any it doesn’t look it like it will be restarted anytime soon.

Analysts don’t expect drilling on Universitetskaya-1 to resume until the end of 2015 at the earliest. That could push the original plans to begin commercial production well beyond the 2017 estimated deadline. Assuming that it happens at all. Some analysts have concluded that the E.U. & U.S. could keep the pressure on Russia for years — even long after the crisis is over — as a punishment.

A Huge Letdown For Exxon Stock

While having a major project be forcefully shut down is a headache, the problem for Exxon in terms of these Russian woes is more of a long-term issue.

Aside from a potential one time write-down due to the closure of the well and its operations in Russia, Exxon shouldn’t see any lower production or profit warnings. Universitetskaya-1 had just begun to see some oil come bubbling up. So this isn’t a worry that a major field is coming offline.

The long term, however, is a different story.

Exxon had viewed Russia as a major source of new reserves and production. As we’ve said before, many of the larger integrated energy stocks have a hard time replacing dwindling production from their legacy fields. After all, it takes some pretty big discoveries and elephant finds to move the needle at a firm like XOM.

For Exxon, Russia was one of those elephants. And with the sanctions now in place — and potentially in place for quite a while — Exxon is going to have to go looking somewhere else to find that 90 billion barrels. Those searches take time and plenty of capex spending. The other route — buying smaller energy stocks — isn’t cheap either. Again, Exxon would need to make another $35 billion XTO-sized buy. Last time I checked, both Apache (APC) and Anadarko (APA) both have $50 billion-plus market caps.

For investors, the sanctions and their potential continuation well after the crisis — as well as the damage they might do in terms of West/Russian diplomacy — are kind of a big hit to Exxon stock, especially in the long term. Sure, there are other projects. But Russia was seen as the real growth element for Exxon stock over the upcoming decade. Without it, investors in XOM may be right back to where they started a few years ago — energy-sector lagging performance.

While it isn’t a sell, Exxon stock isn’t exactly a screaming buy, either.

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

Article printed from InvestorPlace Media, https://investorplace.com/2014/09/exxon-stock-russia/.

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