Login

Log In

Enter your username and password below

Oil Giant Slides Deeper into a Death Spiral

ExxonMobil (XOM) reported earnings on January 30 – and it wasn’t pretty.

The company reported a quarterly drop in profits of 16% year-over-year, while 12-month earnings were down by more than 27%.

Yes, the company earned more than $32 billion in 2013, which is more than the GDP of many countries in the world. But with earnings per share down 13%, it’s tough to ignore the massive downtrend.

It makes me wonder…

When Exxon missed the boat on shale oil, did it fall into a never-ending death spiral?

Before we rush to a conclusion, let’s put these numbers into perspective…

A Nod From Lady Luck

Exxon’s drop in profits was largely the result of lower-than-average oil prices, declining production and soaring costs.

Making matters worse, the company isn’t benefiting from the shale/tight oil revolution that’s making the big bucks in U.S. oilfields.

As I alluded to above, the company began exploring and producing oil offshore and overseas by way of conventional oil plays.

Now, amidst a shale boom, it finds itself competing with companies that are reaping huge rewards with shale oil.

So its decision to ignore the shale revolution is certainly catching up to the company now. But will it haunt Exxon forever?

Perhaps not. Thanks to an acquisition the company made four years ago, it might just stage a much-needed turnaround…

The X-Factor

Exxon acquired natural gas producer XTO Energy back in 2010. And so far, the move hasn’t exactly paid off…

The cost of the acquisition was a whopping $40 billion. And since then, natural gas prices have remained low and production has soared.

But like I’ve mentioned with increasing conviction, the heyday of natural gas is approaching.

Indeed, just eight months ago, Exxon’s own CEO, Rex Tillerson, admitted that the timing for the XTO acquisition was “off.” But the story is already changing in favor of an energy future led by natural gas.

And XTO reached two deals for natural gas ventures this past week that could turn out to be Exxon’s saving grace…

Ace in the Hole?

Obtaining roughly 55,000 acres in Ohio’s Utica Shale this week, XTO will allow American Energy Partners to fund near-term development costs and have access to owned acres scattered throughout Ohio.

Another deal cleared this week boosts XTO control in the Permian Basin to more than 1.5 million total net acres.

If my previous conclusions about natural gas are correct, deals like these will be XTO’s key to reaping long-term profits in natural gas.

With fields in Texas, Louisiana and Pennsylvania as well as operations in Alaska, XTO is set to contribute to Exxon’s bottom line in a big way now that prices are finally at a level where shale gas drilling is profitable.

So despite missing the shale/tight oil stampede, Exxon is not a one-trick pony.

As an integrated oil and gas producer, it does everything from drilling and exploring to refining and marketing.

And now, thanks in part to XTO Energy, it’s locked into the promising future of natural gas.

Exxon shares have sold off in recent weeks and are weaker after the recent earnings release. But the company is more diversified and solid than the current price suggests.

Any weakness in the share price should be considered a buying opportunity for anyone looking to gain exposure to the entire energy spectrum.

And “the chase” continues,

Karim Rahemtulla