The supertanker is turning. Exxon Mobil Corp. is exploring a sale of its assets in the Gulf of Mexico, Reuters reported on Tuesday, citing unnamed sources. If so, it’s a significant step.
Not because Exxon has a lot of assets there; the Gulf of Mexico accounts for a small fraction of the company’s production. Rather, a sale would represent progress. Exxon’s crown has slipped in the past couple of years, as a decade of high spending crushed return on capital. It was by no means alone in this regard. But having long enjoyed a premium versus its competitors, it had further to fall.
Moreover, its competitors made big changes, selling off assets, exiting some businesses altogether and, in a curious turn of events, appropriating the message of capital discipline that was historically Exxon’s calling card. The stock has lagged in the recovery, both against main rival Chevron Corp. and, strikingly, against a synthetic oil major I constructed on the Bloomberg Terminal:
Even so, Exxon remains relatively pricey. Exxon and Chevron are forecast to generate roughly the same free cash flow over the next three years — about $57 billion — yet Exxon’s enterprise value of $410 billion is 51 percent bigger. Royal Dutch Shell Plc, meanwhile, is forecast to generate $84 billion, yet it is valued at only $353 billion.
I threw ConocoPhillips in there even though it’s no longer an integrated oil company (but is still big, with an enterprise value topping $102 billion). That’s because, since revamping its strategy after a humiliating dividend cut in early 2016, Conoco has communicated and stuck with a message emphasizing cash returns, low breakeven production costs and a willingness to trade the portfolio as the opportunity arises. The stock has doubled since then.
Back in February, I wrote Exxon can no longer count on getting the benefit of the doubt and should “be its own activist.” One aspect of this was doing as some of its rivals had done and selling off parts of its business.
One of the drawbacks of the big oil model is that assets which might be material to others — such as, say, almost 100,000 barrels a day of production in the Gulf of Mexico — get buried in behemoth portfolios. Selling them can realize higher valuations, and in cash that can be handed over to shareholders (Exxon has yet to reinstate the share buybacks it was long known for). Trimming the base should also help reverse the decline in returns and send a signal that the expansionary decade preceding the oil crash is well and truly over.
When Exxon unveiled poorly received second-quarter results in late July, it took the unusual step of putting Neil Chapman, who runs its vast upstream business, on the analyst call. He had an interesting exchange with one of them, Doug Terreson of Evercore ISI. Terreson has been banging the drum about rebalancing the industry toward returns and distributions and away from sheer expansion. He asked why Exxon hadn’t been more aggressive on disposals. Chapman gave a lengthy reply, including this:
Now, when you have a portfolio in the Upstream, it’s really important you don’t just add. You look at the area, look at the businesses and the assets which don’t deliver the same amount of value. And I indicated at the time, we are looking very hard at that, and that is indeed the case. There is certainly no philosophical intent to hang on to assets that are underperforming. Far from it, Doug. I can tell you that we are very actively looking at our portfolio.
Brent crude was trading below $75 a barrel that day. It’s now nudging $85. Seems like a good time for some seriously active looking.