If it seems like Exxon Mobil (NYSE:XOM) invests more of its working capital in — and speculates on — new projects than other energy names, you’re not wrong. XOM stock is a riskier name compared to, say ConocoPhillips (NYSE:COP) or BP (NYSE:BP), both of which keep their purse strings closed fairly tight.
Indeed, earlier this year the Oil & Gas Journal reported that exploration and drilling budgets for 2019 were only up 2% year-over-year for projects on U.S. soil, while planned spending on drilling and exploration in Canada was down 1.5 % from 2018’s levels.
The figures are a microcosm of what’s taking shape all over the world.
“We no longer think of our value proposition as merely disciplined, we view it as the new order,” ConocoPhillips CEO Ryan Lance said late last year. Lance specifically mentioned Conoco’s “low capital intensity” as a benefit to investors.
Just because Exxon stock is a riskier prospect in terms of exploration and drilling spending, though, doesn’t make it un-ownable. It just makes it different.
Exxon Mobil Is an Outlier
It’s not an entirely black and white matter, to be clear. BP, for instance, spent a whopping $10.5 billion to acquire a U.S. shale mining project from BHP (NYSE:BHP). Meanwhile, although Exxon has been willing to take shots on some questionable exploration projects, it’s been willing to let go of others.
Case(s) in point: W&T Offshore (NYSE:WTI) has agreed to buy some of Exxon’s oil and gas operations just off the Alabama shoreline. Just this month word surfaced that XOM was likely to sell $1 billion worth of assets in the Gulf of Mexico to Repsol (OTCMKTS:REPYY).
On balance, however, Exxon Mobil has been doing more spending than selling.
CEO Darren Woods explained earlier this year the company’s capital spending budget for next year would be on the order of $33 billion to $35 billion, up from what’s on pace to be a figure of $30 billion this year. For perspective, in 2017 when he was first named chief executive, the company only shelled out $23.1 billion worth of capital expenditures.
Woods’ philosophy erases any doubt that Exxon doesn’t just happen to have access to more projects worth investing in. He explained at the time that Exxon was “leaning in” as competitors “learned back.”
Is Exxon Stock Worth the Risk?
The risk is clear. Should its expensive and riskier projects not pan out as hoped, the company will have spent a massive amount of money with little to show for it. And, even if there really is that much oil, a price rout — not unlike the one that crushed the oil and gas industry in 2014 and 2015 — would make all that capital spending for naught.
So far, however, the outlays have paid off handsomely.
One only has to look at the saga of the company’s offshore project near Guyana to see the heavy cash outlays have been worth it. Within the past week, and for the fourteenth time within the drilling area in question, Exxon Mobil has found an untapped oil pocket. The latest discovery is at the so-called Tripletail site. All told, Guyana’s offshore exploration efforts have uncovered what’s estimated to be 6 billion barrels of oil that until 2017 had been largely overlooked.
Exxon has also literally doubled down in the Permian Basin. In 2017 XOM acquired privately owned property that ramped up its reserves to 6 billion barrels of oil or oil-equivalent natural gas. In March of this year the company announced its expected output for the area by 2024 was 1 million barrels per day — an 80% increase of the previous production estimate.
Exxon Mobil’s project pickers are either very lucky, or very good.
Looking Ahead for XOM Stock
There’s still risk on owning XOM stock to be sure, in the short term as well as the long term. The short-term risk is continued tepid oil prices that only make low-cost projects worth the time and trouble. The long-term risk is the growing potential of alternative and renewable energy sources that will eventually crimp demand for crude and natural gas.
While the United States oil machine is now running at full speed — eliminating any supply crunch — oil prices appear to have at least stabilized. A repeat of 2014 and 2015, at least in terms of severity, seems unlikely.
In other words, Exxon isn’t completely crazy for spending big on developmental projects. Just buckle up for the inevitable volatility, even if the potential reward justifies the risk. Pairing XOM stock up with another, less aggressive oil and energy position could make for more well-rounded exposure to the industry.
If nothing else, it’s going to be fun to watch this one oil giant proverbially swing for the fences while its rivals are settling for singles and looking for a walk.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.