Geopolitical Turmoil Takes Its Toll on Exxon Mobil
Exxon Mobil (NYSE:XOM) had a pretty rotten week. On March 5, it announced that it would reduce capital expenditures this year after having “peaked” in 2013. Its 2014 spending will hit $39.8 billion, down 6 percent from $42.5 billion last year. While that may seem like a good thing (cutting costs), investors apparently didn’t like the idea — its stock price dropped 2.7 percent during midday trading as a result, ending the day as the biggest decline on the Dow Jones Industrial Average. Investors are growing concerned that Exxon may be running out of good projects to invest in. Exxon’s production was down by 1.5 percent in 2013 from a year earlier, and the firm believes it will only remain flat through this year. Meanwhile, Exxon’s costs on a per barrel basis are rising. It cost them $11.48 to produce a barrel of oil equivalent in 2013, sharply up from $9.91 in 2012.
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But its troubles didn’t end there. Although great uncertainty remains, Exxon may also suffer some damage from the unfolding Ukrainian crisis. Its biggest non-U.S. oil project is a collaboration with Russia’s Rosneft in the Arctic, where it has billions of dollars of investments at stake. If the U.S. and the EU slap sanctions on Russia for its incursion into Ukraine and its support for the pending referendum in Crimea, Exxon could face restrictions on doing business in Russia. This would endanger its plans to drill later this year. Exxon has the rights to drill on 11.4 million acres in Russia, which represent holdings for the company that are only surpassed by its acreage in Texas, its home state.
Exxon CEO Rex Tillerson tried to assuage concerns at its annual meeting with analysts, saying that, “There has been no impact on any of our plans or activities at this point, nor would I expect there to be any, barring governments taking steps that are beyond our control.”
In Ukraine, too, Exxon has had to pull back. On March 5, company officials stated that their interest in drilling offshore Ukraine for natural gas will be put on hold. Fortunately for Exxon, it hadn’t yet sunk a lot of money in the prospect, but its opportunity there is effectively cut off for the foreseeable future. Ukraine has been eager to see its offshore gas deposits extracted in order to lessen its dependence on Russia. Exxon hoped to tap Ukraine’s Skifska field, which holds an estimated 200-250 billion cubic meters of natural gas.