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Page added on June 29, 2019

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Is ExxonMobil Making a Strategic Mistake?

Business

Integrated energy giants Royal Dutch Shell (NYSE:RDS-B) and Total (NYSE:TOT) have both made significant investments in the electric- and renewable-power spaces, preparing for a future with less carbon-based fuels. ExxonMobil (NYSE:XOM) isn’t following them down this road, instead redoubling its efforts on oil, natural gas, and the products they are turned into. Why is Exxon making the strategic decision to double down on carbon fuels, and is this choice a big mistake?

The decisions being made

Shell has explained that it hopes to create an electricity business that will rival its oil, natural gas, and chemicals operations in size. It plans to ramp up spending on the electric side of its business to as much as $2 billion to $3 billion a year by 2025. It is already starting to build scale in the space with acquisitions like an electric-car charging business, a U.K. utility (rebranded as Shell Energy), renewable-power assets, and an electric storage company.

An oil rig in the ocean

Image source: Getty Images

Total isn’t far behind. The French oil giant owns a controlling stake in solar panel manufacturer SunPower, and in 2018 bought 75% of European utility Direct Energie. Clearly, electricity and renewable power are important to this energy giant’s future as well. The goal of both companies is to prepare now for a future in which carbon-based fuels like oil and natural gas are less important. Based on global warming concerns, it appears they are making an intelligent allocation decision.

Exxon has chosen a different course by sticking to its focus on oil and natural gas, with big plans to expand its operations in the near future. In fact, it intends to spend as much as $35 billion a year over the next few years to develop new production in the upstream sector and increase its scale in its downstream chemicals and refining businesses. Management has actually increased its spending plans since first laying out its intentions in 2018.

So why is Exxon going against the grain here? From the outside, it looks like a mistake, especially since competitors are clearly hedging their bets.

The world will need oil

Exxon has decided to keep focused on oil and gas because it believes that the world will continue to need material amounts of the fuels for decades to come. The company expects demand to grow slightly between 2016 and 2040. The rate of increase won’t be huge, but it doesn’t expect demand to fall. A drop in oil demand is what is being projected based on the global push to keep average temperatures from rising no more than two degrees Celsius.

A slide from an Exxon presentation showing that even if the Paris accord's 2 degree mandate is met there will be a huge need for additional oil and natural gas supply

ExxonMobil’s strategic blueprint. Image source: ExxonMobil

There are actually two bets hidden within this decision. The first is that the world won’t be able to meet that 2 degree mark, which so far seems like a decent choice. In fact, most countries are falling short of the goals set out in the Paris Climate Accord that created the 2 degree target. The United States notably pulled out of that accord. Simply put, Exxon believes oil and natural gas are too integral to the world to simply jettison them from the energy picture.

But even if the 2 degree goals are somehow hit, Exxon isn’t all that worried about its choice. That’s because oil and natural gas are depleting assets. Once you pull a barrel of oil out of the ground, it is gone forever. Eventually, even the most prolific oil plays run dry. You need to continually replace the oil and natural gas you use with new sources if you want to maintain production over time.

Hitting the 2 degree goals would lead to slower growth for natural gas and an outright decline in demand for oil by 2040. When you pair demand with supply, however, you see that the world will still need to spend huge amounts to find new production because of the effect of depletion. The numbers are big either way. In Exxon’s model, the world needs to find 550 billion barrels of new oil supply by 2040, with the 2 degree goals dropping that down to a still-material 370 billion barrels. The same general story holds true in natural gas, except that overall demand grows even under the 2 degree scenario. So even if the world can come together on the global warming issue, huge new supplies of oil and gas will be needed. And companies like Exxon will continue to have ample opportunities to invest in carbon-based fuels.

To be completely fair to Exxon, it isn’t actually ignoring the global push to limit carbon emissions. It has been investing in technology to create biofuels through the use of algae. Although it could be characterized as a moonshot, the hope is that these algae-based biofuels will allow the company to continue using the infrastructure it has today instead of starting over in a wholly new business. Once again, the company’s controlled approach to change is on clear display.

Conservative and strong

Exxon has a long history of being conservative (note that long-term debt is a tiny 10% or so of the capital structure). It doesn’t generally make dramatic business shifts. Looked at this way, sticking to its knitting makes sense since it appears that oil and gas will be vital sources of energy for at least the next two decades. That remains true even in the best-case scenario for carbon reduction.

And there’s another fail-safe here. With such modest debt and enough cash flow to invest $35 billion a year in its oil business, Exxon could easily afford to buy a large utility if its energy outlook proves misguided. So it looks to be positioned just fine for the future, even in a worst-case scenario for oil.

fool.com



22 Comments on "Is ExxonMobil Making a Strategic Mistake?"

  1. print baby print on Sat, 29th Jun 2019 8:32 am 

    Why would anyone who is making enormous profit in some field and is highly specialized in the field, would change that field.
    Welcome to the peak oil.
    Electricity my ass

  2. Duncan Idaho on Sat, 29th Jun 2019 9:43 am 

    Seems they are taking the “rape and loot”approach of late stage capitalism.
    Might be best in the short term.

  3. Gaia on Sat, 29th Jun 2019 12:43 pm 

    We won’t be seeing a futuristic utopic world but a dark, dystopic world.

  4. joe on Sun, 30th Jun 2019 8:14 am 

    Exonn made its strategic mistake when they did Climate Research about the link between carbon emissions and global temperature rise, then buried the findings 40 years ago. Thats the thing as what the cigarettes companies did with cancer yet they had to pay up billions and lost their grip on society and politicans. The same thing should be done with oil companies and their billions should go back to the people who paid the highest price for it, like the land owners of Nigeria, Iraq, Iran, Syria etc and small island cultures now about to go extinct who we might give some land to somewhere so they might not be forgot by history…..
    Instead of saving Mexicans the US might save the people of the islands poised to vanish due to climate change. Lets at least die in honor rather than disgrace….

  5. Kenz300 on Fri, 5th Jul 2019 3:25 pm 

    Wind and solar are the future.
    Fossil fuels and their destruction of the environment are the past. You can not hide from the Climate Crisis.

  6. Kenz300 on Fri, 5th Jul 2019 3:49 pm 

    JuanP should stop stealing identities and using socks.

  7. More Davy Identity Theft and Projections on Fri, 5th Jul 2019 4:12 pm 

    Kenz300 on Fri, 5th Jul 2019 3:49 pm

    “stop stealing identities and using socks.”

  8. The Church Lady on Fri, 5th Jul 2019 4:25 pm 

    For deeply scared into DAVY’S scalp is inscribed HIS true identity, BEELZEBUB the BEAST, FATHER of LIES and WHORES.

  9. Kenz300 on Fri, 5th Jul 2019 4:35 pm 

    The moderators should ban JuanP. He is making a mockery of this forum.

  10. More Davy Identity Theft on Fri, 5th Jul 2019 4:47 pm 

    Kenz300 (AKA Davy) on Fri, 5th Jul 2019 4:35 pm

  11. More juanpee butt breath on Fri, 5th Jul 2019 4:53 pm 

    More Davy Identity Theft on Fri, 5th Jul 2019 4:47 pm

    Kenz300 (AKA Davy) on Fri, 5th Jul 2019 4:35 pm

  12. More Davy Child Like Behavior on Fri, 5th Jul 2019 4:56 pm 

    More juanpee butt breath on Fri, 5th Jul 2019 4:53 pm

  13. More Davy Nuttery - Delusions and Stooopidity on Fri, 5th Jul 2019 5:17 pm 

    More Davy butt breath on Fri, 5th Jul 2019 4:53 pm

  14. Timothy Blaine on Fri, 5th Jul 2019 6:21 pm 

    The moderators should ban Davy. He is making a mockery of this forum.

    Davy behaves like a spoiled child in constant need of special attention. When he misbehaves, he should be banished. Oh wait, he was banished from St. Louis to Deplorable Central USA. Unfortunately, the adults failed to contemplate the internet.

  15. Kenz300 on Fri, 5th Jul 2019 6:28 pm 

    JuanP is out of control. Moderators can’t you do something???

  16. More Davy Identity Theft on Fri, 5th Jul 2019 6:38 pm 

    Kenz300 on Fri, 5th Jul 2019 6:28 pm

  17. Davy on Fri, 5th Jul 2019 6:39 pm 

    Hey JuanP, you’re a baby, baby, stick your head in gravy. Wrap it up in bubblegum and send it to the navy.

    See, two can play this game!!!

    Dumbass.

  18. More Davy Child Like Behavior on Fri, 5th Jul 2019 6:43 pm 

    Davy on Fri, 5th Jul 2019 6:39 pm

  19. JuanP on Fri, 5th Jul 2019 6:45 pm 

    Oops, sorry, I am JuanP not Davy

    Davy on Fri, 5th Jul 2019 6:39 pm Hey JuanP, you’re a baby, baby, stick your head in gravy. Wrap it up in bubblegum and send it to the navy.
    See, two can play this game!!!
    Dumbass.

  20. More Davy ID Theft on Fri, 5th Jul 2019 9:21 pm 

    JuanP on Fri, 5th Jul 2019 6:45 pm

  21. Cloggie on Sun, 7th Jul 2019 4:03 am 

    The difference in behavior between Shell (NL-UK) and Total (F) on the one hand and Exxon (US) on the other, is entirely explained by the attitudes of the EU vs US governments.

    The EU has a radical “federal level” renewable energy policy, the US hasn’t.

  22. Davy on Sun, 7th Jul 2019 5:27 am 

    “The EU has a radical “federal level” renewable energy policy, the US hasn’t.”

    The US has a significant renewable effort that is not yet stalling like Europe. California has a state policy as does several other states. Whether or not a “federal policy” with grandiose goals is effective is yet to be seen. The hardest part is ahead and this may explain why Europe is stalling.

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