Exxon increases bet on shale

Exxon Mobil Corp. is trading in long-term projects that pump oil over decades for U.S. shale drilling that can be switched on or off as crude prices change.

Long a world leader in multi-billion dollar oil and natural gas developments that take years to build and even longer to profit, Exxon is diverting about one-third of its drilling budget this year to shale fields that will deliver cash flow in as little as three years, said Chairman and Chief Executive Officer Darren Woods.

Next year, U.S. shale will absorb 50 percent of Exxon’s worldwide drilling budget, Woods said Wednesday during his first public appearance since succeeding Rex Tillerson in January. Output from shale wells will grow an average of 20 percent annually through 2025 as Woods intensifies the company’s focus on the Americas.

“The shift from long to short is really a reflection of the opportunity that has grown in the short-cycle business,” Woods said. “That part of the business isn’t in discovery mode; it’s in extraction mode.”

Exxon was a late-comer to shale, shunning it for the first decade of this century as a niche that couldn’t generate enough output to make a mark on the balance sheet of a major international explorer. When Tillerson steered Exxon into shale drilling with its $34.9 billion acquisition of gas explorer XTO Energy in 2010, he conceded Exxon had missed out on the first wave of the fracking revolution.

Woods, a 52-year-old electrical engineer by training, joined Exxon as an analyst in 1992 and rose through the ranks on the refining and chemicals side of the business. In an appearance before analysts and investors at the New York Stock Exchange, he discouraged observers from assuming his background in the so-called downstream side of the business would tilt his decision making.

Using “past actions of mine as a rule book” to assess future decisions probably won’t work, according to Woods. Exxon’s leadership-development process prepares executives to oversee any part of the corporation, so that “when you go through that management process, you become fungible,” he said.

Woods deferred several times during his presentation to his main rival for the CEO’s job, Jack Williams, to provide insight on the company’s shale and other oil-drilling activities. Williams, a senior vice president and member of Woods’ four-person inner circle, oversees Exxon’s oil production and refining business lines.

Cool and Controlled

The new CEO’s relaxed, controlled demeanor harkened to that of his mentor, Tillerson, presenting analysts with a seamless leadership transition. Like his predecessor, Woods deflected questions about quarterly and annual financial and production metrics by stressing Exxon’s multi-decade horizons on dividends, profitability and value-creation.

Exxon won’t be “making decisions based on annual or short-term views,” Woods said.

The world’s biggest oil explorer by market value will spend more than $5.5 billion this year to drill wells in the U.S. Permian and Bakken shale regions, among other so-called short-cycle assets, Exxon said in a statement on Wednesday. The Irving, Texas-based company is targeting annual output equivalent to 4 million to 4.4 million barrels of oil a day, excluding the impact of divestitures.

Investors may still be looking for more as Exxon “continues to struggle to showcase upstream volume growth over the near to medium term,” said Vincent Piazza, a Bloomberg Intelligence analyst. The company’s production has fallen in four of the past five years and averaged 4.05 million barrels a day in 2016.

Exxon has never been more out of favor with analysts in its modern history. The proportion of ”buy” recommendations among analysts following the company is at its lowest since at least 1997, two years before the $88 billion Mobil merger. Seven analysts have the equivalent of a sell rating on the company, with five buys and 17 holds.

Key Platform

During his address, Woods spelled out Exxon’s strategies for bolstering reserves, lifting oil and natural gas production, and increasing cash flow. A key platform of his address was Exxon’s investments in the Permian Basin of Texas and New Mexico, the largest U.S. oil field.

Annual output from Exxon’s Permian, Bakken and other U.S. shale holdings may reach the equivalent of 750,000 barrels a day in 2025, according to the statement. That would be more than the current output of Qatar.

See also: Exxon’s post-Tillerson fortunes pivot closer to home

Exxon agreed in January to pay as much as $6.6 billion in an acquisition that will more than double the company’s Permian footprint. In its biggest transaction since the XTO purchase, Exxon agreed to hand over $5.6 billion in shares, plus as much as another $1 billion in contingent cash payments for rights to drill the Permian’s Delaware region.

Profitable @ $40

When the transaction closes, Exxon’s Permian asset base will hold the equivalent of 6 billion barrels of crude, an asset that’s worth $324 billion at current oil prices. Wells drilled in the acquired area will generate “attractive returns” even if crude drops back down to $40 a barrel, Exxon said when the deal was announced on Jan. 17.

West Texas Intermediate crude, the U.S. benchmark, has averaged about $50 for the past six months.

Woods takes over as Exxon faces some tough challenges in recovering from a market collapse that erased more than $154 billion in Exxon’s discounted future cash flows as fields that prospered during the oil bull market became money losers. At the same time, Woods removed the equivalent of 3.3 billion barrels of untapped crude from the books last week in the biggest reserves reduction since at least 1999.