Is Exxon Mobil Heading for an Inflection Point in 2014?
In the general scheme of things, you have to spend money to make money — investments generate returns in proportion to the principal, compounding interest aside. Unless the investment is faulty, this means that the more you invest, the more benefit you ultimately receive. This is particularly true in the capital-intensive oil and gas industry, where every barrel of oil requires a tremendous amount of equipment, labor, and expertise to extract. (Fun fact: In 2009, the U.S. Energy Information Administration estimated average upstream costs of $33.76 per barrel of oil equivalent.)
So when Exxon Mobil (NYSE:XOM) announces that it’s reducing capital expenditures by 6.35 percent for the current year, some red flags go up on Wall Street. Reduced spending could translate into reduced production, and reduced production could translate into reduced earnings — that’s a lose-lose scenario for the company and its shareholders. The news put some selling pressure on the stock in early trading on Friday.
But shares had recovered by the time the market finished its first cup of coffee. In a press release explaining the capex changes, Exxon Mobil Chairman and CEO Rex Tillerson assured shareholders that reduced capex would not yield reduced production. In fact, he was expecting the opposite for 2014.
“We are adding new volumes that improve our profitability mix with higher liquids and liquids linked natural gas volumes. We’re also driving increased unit profitability through better fiscal terms and reducing low-margin barrel production,” said Tillerson. All told, Exxon Mobil is starting production at a record ten facilities in 2014 and adding new capacity of approximately 300,000 net oil equivalent barrels per day.