Wall Street is unhappy with the performance of ExxonMobil’s share price. In the race of Big Oil share prices, Chevron is clearly winning. The discussion of relative share price performance is recently focusing on two things that distinguish the two oil giants. Unlike ExxonMobil, Chevron opted to stay out of Iraq and hasn’t yet purchased a US shale gas company. This begs the question: Who was right?
Wall Street is notorious for taking a short term, even quarterly, view. ExxonMobil has made a business out of taking the long view. Backseat drivers with the benefit of hindsight are saying that ExxonMobil should have foreseen the drop in natural gas prices and shouldn’t have purchased XTO in 2009 but should have waited to buy a shale company when the costs per 1,000 cubic feet would have been cheaper. Even putting aside the fact that Wall Street itself foolishly still believed that we were running out of oil and gas in 2008 and 2009, paying a premium to buy XTO and buying it early was a smart move.
ExxonMobil, as an experienced player, understood better than Wall Street how big and important shale expertise was going to be, not just in the United States, but around the world. It also knew that it didn’t want to get in bed with an operator with high environmental liabilities and bad operational practices. Some of the shale companies Wall Street loved best in 2009 are precisely the ones who have tarnished the industry so badly right now on the issue of fracking. One reason XTO could command a premium per share was that it was a top, high quality operator. Rex Tillerson should be praised for purchasing a well-managed company with good operating principles, not second guessed about whether he could have predicted a commodity price change when institutional investors were even more incorrect about natural gas price trends. ExxonMobil was thinking about its long term interest in being a leading global shale producer when it purchased XTO. It wasn’t a financial gimmick to raise its share price for a quarter or two. It was a smart, strategic decision. The shale play is so big and so important, Chevron itself is questioning its own options. Rumors abound that the company is considering making its own XTO-style acquisition.
It is open to question whether Wall Street will prove correct about anything related about how oil companies should deploy their capital. Let’s not forget that Wall Street preferred Enron to ExxonMobil back in the day. And, the jury is still out on whether oil and gas prices will collapse in the future. If they do as some are predicting, the decision to shed downstream integration on Wall Street’s recommendation could look truly stupid. Companies that no longer own refining and marketing have to hope for a cataclysm in the Middle East to keep oil prices high. It is worth noting that some independents are looking for natural gas sales into the transportation sector to ensure offtake.
Wall Street also typically rewards companies for taking big bets on high reserve, long-term mega-projects when the reality is that those projects don’t always pan out. Several companies that made big bets on Caspian oil have long disappeared. Expensive liquefied natural gas (LNG) investments, including empty LNG US receiving terminals, could also wind up under water. It is probably too early to say whether investments in Iraq will be a boon or a bust but given current regional conflicts and internal Iraqi political trends, perhaps Chevron was correct to be cautious.
For both long-run shareholders and society in general, stewards of energy investment capital need to be able to think and act strategically. Congress should consider that as it delves into revamping the tax code. When Wall Street penalizes companies for the inclination to environmental stewardship and operational excellence, that is the root of a problem that concerns everyone.