Conference Calls: 2016 Analyst Meeting
March 6, 2016
I want to more systematically document key conference calls, and will start with XOM and DISH (I welcome any suggestions for absolute must-read CCs). The write-ups will get better over time as I better organize my key takeaways from them. For this XOM analyst meeting transcript, it is so long that I simply ran out of gas; so my only contribution is a ‘fantasy’ SOTP valuation at the end.
The outline of the post is as follows:
- Presentation Notes
- 17 Mile SOTP
* * * * * * * * * * * *
Key operational drivers
- Systematic implementation and continuous improvement of core principles
- Risk management and operational excellence
- Investment and cost discipline; world-class project execution
- Technological leadership
- High-performing workforce
- Risks to business include: technical, operational, financial, environmental, geopolitical
- OIMS: Operations Integrity Management System
- Capable people in leadership positions, who…
- …Implement policies and standards with clearly defined accountabilities and expectations
- Identify potential hazards; put appropriate barriers and controls into place
- Operational improvements have reduced cumulative greenhouse gases by more than 20 million metric tons over past decade
- Increased energy efficiency over time by installing additional cogeneration facilities
- Gross cogeneration capacity 5.5 gigwatts
- Studied climate change for almost 40 years; consistent collaborate an share research with relevant players
Benefits of integrated model
“…our global supply organization utilizes sophisticated demand planning and marketing tools that provide insights to achieve the best value for our upstream production. Approximately 80% of our refining capacity is integrated with chemicals and our lubricants manufacturing. This integration provides XOM with unique manufacturing flexibility to maximize value with changing market demand. To build on this advantage, we are selectively investing across the value chain, employing high-impact technologies that further expand feedstock and product flexibility.”
“Our global functional structure along with centralized research and technology development provide the foundation. Shared services and centers of expertise promote an integrated learning organization and encourage a culture of continuous improvement.”
Focus on efficiency
- 38% leaner since the 1999 Exxon and Mobil merger
- “…manage staffing effectively over time, capturing efficiencies while supporting business growth by increasing productivity, deploying technology and harmonizing processes.
- Current asset base – including XTO – supported by fewer employees than ‘legacy XOM’ pre-Mobil merger
- $11.5 billion net reduction of capex and opex base in 2015
“Our approach to asset management incorporates achieving maximum value for our shareholders by being active in the marketplace at all points of the business cycle. We are not event-driven. Rather, we test whether the market places a higher value on assets that are no longer strategic to us than we place on continuing to hold them. This approach avoids forced sales at the wrong point in the cycle. And the specifics of those sales are set by our groups of assets, based on their highest value.”
“We tend to divest end-of-life and nonstrategic assets. We are opportunistic. We sell assets when they command the best value in the market, not because we have to…”
- Population expected to increase to 9 billion people
- Global economic output to more than double
- Global energy demand rises by 25%, even after massive efficiency gains
- Non-OECD accounts for 70% of global energy demand
- OECD output grows by 70%, but energy demand remains flat
- Without OECD efficiency gains, energy demand rises 4 times 25% estimate
- Oil and gas comprise 60% of supplies…oil retains leadership position
- Gas rises most, surpassing coal for 2nd place
- Global LNG trade triples
- 2015 earnings: $16.2 billion
- 2015 ROIC: 7.9% – 4% higher than nearest comp
- 5ya ROIC: 18% – 5% higher than nearest comp
- No impairments taken, versus $120+ billion over last two years, and $200+ billion over last eight for industry
- 73% of proved reserves developed and in production
- 91 billion BOE resource base; 25B proved
- Replaced 100% of production over last twenty years – 1-2 billion BOE per annum
- 16-year reserve life at current production rate
- Replaced 67% of total production in 2015; but 219% of liquids…indicative of uneconomically low gas (obviously)
- 2015 FCF: $6.5 billion – $100B over last five years
- Reduced shares by 40% since Mobil merger, including XTO shares issued
- 2016 capex: $23 billion
- 2017 capex: <$23 billion
- 2016-2020 production: 4-4.2 billion BOED
- $0 buybacks in 1Q16
- Next-generation seismic imaging technology – ‘wavefield inversion – utilizes more information from the seismic signal to provide an improved, more detailed understanding of the subsurface. Used in recent exploration and appraisal programs in the Romanian Black Sea and offshore Guyana.
- Reservoir simulation platform efficiently translates subsurface characterization into cost-effective development plans, lowering capital costs.
- Advanced digital technology applied to production and equipment surveillance increases production and lowers costs
- ‘Fast Drill’ technology has saved billions in production costs
- Reliability improvements have delivered sustained additional production of 100k BOED
- Production optimization activities delivered an additional 105k of incremental production via improving wellbore and reservoir productivity thru gas lift optimization, well restoration and pressure maintenance
- In total, 200+ KBOED added via optimization technology at extremely high ROIC
- Total resource: 15 billion BOE
- Focus areas: Permian and Bakken
- 2.1 million acres
- Production: 220 KBOED
- Operate 80% of US unconventional assets
- Reduced rig count by 60% from 2015 peak levels
- 60% reduction in Permian Wolfcamp D&C costs to less than $10/BOE
- Reduced drilling days, increased lateral links and market savings reduced cost per foot by more than 60%
- Longer lateral links and improved completion designs have improved recovery per well by more than 80%
- Permian ‘learnings’ applied to Bakken, driving D&C down to less than $11
- Drilling inventory of 50,000 locations – net production could grow by an incremental 1MM BOED
- Portfolio of approximately 100 projects to develop over 20B BOE
- 22 major projects started up since 2012, adding more than 940K of working interest capacity
- 6 started in 2015, adding 300K
- Additional 10 by 2017, adding 450K
- Offshore Abu Dhabi Upper Zakum field production over 660K; production will be increased to 750K and sustained for 25 years. Evaluating project to expand to 1MM.
- Evaluating heavy oil project with EUR of 7B. Could add 2.4MM BOED by 2030
“Cumulative project management experience, engineering expertise and effective contractor interfaces deliver exceptional cost and scheduled performance. We complete comparable projects more timely and at a lower cost than our competitors. Each project that we execute is reappraised for performance, and learnings are incorporated into future project planning, design and execution, further strengthening our capabilities and using every project as a learning experience.”
- 1.4B BOE added to resource base in 2015
- Highly selective exploration program:
- Explore near most profitable areas where discoveries can be tied back to existing infrastructure
- Explore new areas with potential high-resource density – higher risk, but ‘much higher potential’
- Guyana is a new area, with 8.1MM gross acre position (HES also tied to the project…’Street’ all bulled up on its Guyana interest)
Future of integrated business model
Douglas Terreson, Evercore ISI:
“Rex, during the past decade, the super majors have struggled to grow and when they did grow, it often came at the expense of returns and valuation and higher financial leverage. And while Exxon has performed in superior fashion and you’ve done a lot better than the peers and the model is clearly time tested which I think you demonstrated today, my question is, when you consider these broader outcomes, how does the company think about the future balance between growth and returns? And is there need for adjustment there?
“And also, how do changes in industry structure during the past decade or so play into your strategic thinking? That is when you – and or do you consider them to be an important part of the equation when you’re thinking about the future?”
“Well, as we’ve said many times, in terms of growth, where there’s volume growth, reserve growth, market share growth, we really do – our approach of the business has never changed. We really are trying to undertake the most attractive opportunities that we see, thinking about them in terms of 30 years. Are we going to be happy with this over the next three decades? Not. Are we going to be happy with it over the next three years or four years?
“So, all of the pieces that have been put in place, even those that have characteristics that would appear to be short – term in nature and our North American unconventional position and the whole strategy behind the acquisition of XTO to get ourselves in a position to participate, and what we realized was going to be an emerging important new resource base for the world. I would not try to fool you or lead you to believe that we knew what was going to happen, because we did not. It has exceeded anything we could have imagined.
“But I am very, very glad that we had the organizational capacity to participate in that evolving and emerging new resource area the way we have been able to participate and we would not have been able to do that, but for that all your strategic decisions. So, even that decision, while the characteristic of their activity and their decisions on a day-to-day basis are fairly short term. Our decisions on how we’re approaching that are with a 30- to 40-year time horizon in mind. And it’s the reason we don’t get overly exercised about what’s going on in any given quarter or any given year, rather how do we get – how are we going to get the value for the shareholder over the next 30 years.
“So, nothing has changed fundamentally about our approach in terms of trying to achieve growth for growth’s sake. And that’s why we took a lot of grief and we take a lot of commentary when the volumes don’t grow or when the volumes went down 100,000 barrels a day instead of going up 100,000 barrels a day.
“I think if you had us all take our shirts off, you’d find we have pretty thick skin. So, it doesn’t bother us. We are unpersuaded by any of that. We know that what it’s all about is I got a dollar of the shareholders’ money. What can I do with that that they would be proud of, and they would say, that was a good investment and thank you, and that it is supplying the dividends for the future, it’s supplying the capability to replace what’s depleting, because we are in a depletion business.
“Now, I think, one of the things that seems to be lost on people is, just staying flat. When you’re running a depleting business, that’s quite an accomplishment, just to stay flat. So, we invested something like $19 0 billion from the 10-year period prior to 2015. And that $190 billion, that’s more than half our current market cap over the last five years.
“So, they will say, well, you’re not growing. Well, that just tells you how hard it is to hold your own in a depleting business. It’s the nature of what we do. We all understand that. And so what we’re really trying to do is just deliver best value and nothing has changed about that.”
Asset divestiture philosophy
“Well, on asset management, sale of assets, no, we do not set up target. We don’t go into the y ear in a strategic plan
with a target. Now, the only thing that is in our plan is if we’ve got an asset sale that’s already – we have an STA, so
we build it in and it’ll close. That has been fundamental to our business for the last 20 years, at least.
“And it is – I tried to lay that out in that chart that we view, and our line organization understands we view, that
constantly looking at the portfolio of assets they have and challenging themselves, are we getting the best value for
this asset? It belongs to the shareholder, are we getting the best value?
“And if from time to time, we need to go test the market to convince ourselves that we’re going to get more value
out of keeping it than we are to sell it, then we’re not doing our job. And so, it is just the base part of our business.
And we have parts to the organization and all the business lines that that is their charge. That’s what they do. And
so, they are constantly engaged with the marketplace to understand where something may have value.
“We will make strategic divestments as we are changing the business itself. So, I would say, we’re going to take a
fairly comprehensive, strategic assessment of our refining asset about five years, six years ago, and concluded that
we got a lot of assets that are just not going to compete in the future. And we looked at them and said, well, could
we invest into them? Could we change something about the logistics? Could we make them, put them in a position
where they will deliver the value? And we did an assessment. We know what that’s going to take and then went out
the market and said, well, how would someone else value this?
“And so, for a lot of other people’s strategic reasons, we sold. We’re able to sell a lot of refineries and a lot of
logistical assets that went with them, terminals and some pipelines and things like that. And when we looked at,
and said, gee, that was great value for us because then we take the human ta lent that was working on trying to
make that better, we put them on things that deliver higher value and redeploy it.
“So, we don’t issue a target because we never have run the business that way. It is – it’s just – we view it as a part of
base business. And I think not getting yourself in a position where you have to sell something, and we’ve never put
ourselves in a position where we had to sell something, and on the flip side of acquisitions, nor have we ever tried
to get ourselves in a position where we had to buy something. So, it is always with a view that this has got a long-term
outcome to it that we’re trying to achieve. So, you won’t ever see us announcing that we have a divestment
target. Why others do it? You’ll have to ask them. I think it’s foolish. You’re signaling the market. I think you’re
destroying value when you do that. But it’s their business, they get to run it how they want to.”
Paul Sankey, Wolfe Research:
“Rex, what stopped you from doing a deal given that we’re, obviously, in a down-cycle now? Last year, I think, we came out of the meeting last year thinking likely that you might be looking to make acquisitions. What’s held you back and what would change to make you do a deal over the coming 12 months before we meet again?”
“Well, I think, there’s been two – two things have happened over the last year or so. First, expectations are yet to
come in line on the part of sellers versus buyers. And that’s a fairly common – I mean, that’s a theme you’ll hear
from everyone. But I think the other thing that’s happened is there’s been a fair amount of value destruction in the
last year of somebody’s companies as they have continued access capital markets and levered up, as they’ve issued
additional shares and diluted their existing shareholders down. And so, when we do those evaluations and we – as
you can imagine, we look on an ongoing basis to understand how would that impact our results and is it going to
be accretive, is it going to add value or is there – has the value just – has kind of been destroyed? And it’s not
there anymore. It’s like buying a home with a big mortgage on it and there’s not a lot of equity left there
that you can build on. And then, when you bring it into our consolidated results, it’s really – you’re pushing a big
bow wave to try to get over there. Doesn’t mean we couldn’t do it, but it’s certainly – so you have that tension
between the value – some of the value’s been destroyed and the expectation hasn’t changed. And so it’s gotten
even – obviously it’s gotten more difficult, not easier. And that’s what I hear when I talk to others and this is what
I experience when I chat from time to time with some people who I think would like to do something. But they’ve
gotten themselves in a position that they can’t figure out how to explain to their shareholders now. And so it’s a
tough place that they’re in and it’s tough for us and we would like to do something, we would. There is a lot of
quality resources out there. It’s just how they’ve been encumbered.
“So, what we’re finding is we’re spending more of our time on asset deals because that ‘s still a space that people are
willing to do and they need to do and want to do. And so we’re still pursuing asset deals of varying sizes this time,
and we stay open to something more that it has become more challenging for certain – for certain companies in –
in, particularly, the pure play E&P sectors become more challenging.”
NT oil price outlook
“And just secondly, on nearer term oil price outlook, you mentioned it’s not just North America which is a trigger. Just curious, your thoughts on – or anyone else on the panel for that matter, thoughts on OPEC, Russia, Iran, that kind of stuff versus perhaps lower demand from China and other emerging markets?”
“Well, it’s all the above, all of the factors are at play here, as all of you know, the history of how the correction came
about. We’re still overproducing, oversupplying a market that doesn’t need it, doesn’t want it right now. We’ve got
global economic conditions that are not particularly inspiring. U.S. GDP likely to be less than 2% this year. Europe
is going to be struggling to slide sideways again. And China is on a bit of a transitional period themselves. And so I
think – I don’t think we can look to the market demand side to necessarily solve this quickly for us. Ultimately,
that is an important element of how this gets solved is demand does have to continue to grow, and we do
anticipate demand growth this year.
“So, that’s why I’ve said this thing and I said last y ear, but it needs to just settle in for this to be with us a while. My
view has not changed a lot in that regard other than there are suppliers around the world who are certainly in a lot
more duress today than they were a year ago. How they react to that then can either extend this or bring it to a
conclusion and I don’t pretend to know what they’ll decide to do and it’s all for different reasons.
“Within OPEC countries themselves, there are member countries that are under great duress as you well know.
And so, they may not have the high cost marginal barrel, they may have some of the lowest cost marginal barrels,
but if they don’t maintain some level of reinvestment activity, decline rate is going to take over for them and they
may have some of the most competitive barrels, but those barrels are declining, which means they’re coming out
of the market. And that’s happening because governments have gotten themselves in difficult financial situation
and they’re not willing to make the money available to maintain their volumes.”
17 MILE SOTP
On page 15 of its Analyst Meeting presentation, XOM indicates that in the last ten years it has divested 300K BOED of production for approximately $24 billion. This works out to $80,000 per ‘flowing barrel’. If $80,000 is applied to current production of 4.1 million BOED, XOM’s 25B of proved reserves are worth approximately $328 billion, or $79 per share.
With a total resource base of 91B BOE, ‘unproven’ reserves (UPR) are roughly 66 billion. Valued at $2/BOE, UPR are worth $132 billion, or $32 per share.
Refining and Chemicals earned a cumulative $52 billion over the last five years, or call it $10.4 billion per annum. Conservatively valued at 10 times, R&C is worth $104 billion, or $25 per share.
4Q15 Current Assets – Current Liabilities – Total Debt = $50 billion of net debt, or $12 per share.
- Production: $79
- UPR: $32
- R&C: $25
- ND: -$12
- SOTP FVPS: $124
In a fantasy break-up of XOM, it is likely current production goes for a higher multiple than legacy divestitures, and the R&C segment (much?) higher than 10 times. Also – it is difficult to fathom the infrastructure assets embedded within XOM, after more than a decade of highly efficient integrated operations. Would a fantasy break-up of XOM yield upwards of $200? We’ll never know, but interesting to pontificate.