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Investment inevitably has a time component to it. If you invest for dividends, and most Exxon Mobil (NYSE:XOM) investors do so, this means you are in for the long haul. The challenge is that dividends are a small fraction of the value of a share and so it takes a long time to recover your capital. On the other hand, share prices are volatile. The 52 week range in share price for Exxon Mobil is $57.96 to $106.40. That is a $48.44 price differential in a single year. With the current dividend being (annualised) $3.52, it is easy to see how one can have an unhappy investment experience with XOM, especially in today’s world where the share price is at decadal high. The corollary of this is that you need a long horizon to get happy with XOM dividends. I acknowledge that there are a lot of very long term XOM investors who are very happy with their dividend earnings and this is good for them. Here I’m addressing potential new investors. I think new investors need to become comfortable with XOM’s long term prospects before buying XOM shares at record high. As I show here, there are some major barriers looming which threaten XOM’s long term business. New investors need to tread carefully.
Short-term issues
We are living in pretty mad times and any investor who thinks they know how things are going to play out is either deluded or overconfident. The Russian invasion of Ukraine has removed almost overnight a significant part of Europe’s natural gas supply and the oil supply is likewise challenged, with OPEC playing games to keep oil prices high. Meanwhile, the US Government is dipping into its oil reserves with abandon, with 180 million barrels released and more to come if needed this winter. The Biden Administration is optimistic that it will be able to replenish the reserve at or below $67-72/barrel.
It seems likely that prices will stay high for both oil and natural gas, but this in itself is an invitation to replace these energy sources with less challenging solutions that don’t expose major world markets to energy uncertainty. Adding to the supply/demand crisis is the fact that there is a climate crisis which is both expensive and dangerous. Climate change is headline news everywhere and addressing climate change means emissions reductions, which means less oil and gas. Oil and gas is the lifeblood of XOM. Darren Woods describes XOM as a hydrocarbons company.
Given the above, it seems unlikely that in the short term oil and natural gas prices will crash and so companies like XOM are likely to continue to be cash cows. I expect that the upcoming Q3 2022 earnings will involve mountains of cash. However, in this situation lies the seeds of a move to exit fossil fuels. A core feature of fossil fuel exploitation is imbalance in supply/demand and consequent huge cyclic price swings. Only recently is it becoming recognised that these huge price swings don’t need to be a central feature of the energy system. Renewables, once built, provide 20 years of essentially cost-free power provision and they now cost less to build than the annual cost of a fossil fuel-based power plant. If management of XOM is threatened by the rise of renewables (and I suspect they aren’t) it is seen as a decadal problem and therefore not too threatening to dividend investors. I argue that complacency is not warranted as long term trends to exit fossil fuels are building. The ground is shifting rapidly.
The pincer movement: both oil and natural gas markets are under threat
Two major areas of oil and gas consumption are clearly under immediate threat.
Threats to oil consumption
I was amazed to see recently that the transport sector accounted for an astonishing 37% of CO2 emissions from end-use sectors. Moreover wheeled transport is by far the biggest contributor (~76%) to global transport emissions. I had thought that shipping and aviation are a major part of transport emissions, but these segments account for just ~11% and ~9% respectively. Wheeled transport is the big one.
Equally astonishing to me is how Darren Woods describes his comfort that XOM will continue to have a huge market for its oil in transport, even if (when) personal transport is fully electrified. His take is that growth in transportation fuels will take over in the future. I’ve addressed the issue of wheeled transport (which includes use of biofuels) recently. My take is that all wheeled transport is getting electrified fast and we are entering the end of the Internal Combustion Engine.
Threats to natural gas consumption
The thing about natural gas/LNG is that it needs infrastructure and once this is built customers get locked in, regardless of what happens to the price of LNG or Natural gas or indeed its availability. Emerging Asian markets have been seen as providing a huge market opportunity for LNG, but countries having locked in at low prices are now having second thoughts as prices have skyrocketed.
For example Singapore gets 95% of its electricity from natural gas (via pipeline and LNG). Notwithstanding long term contracts, prices are skyrocketing and this has led to search for alternatives. The Sun Cable project to supply up to 15% of Singapore’s electricity from a huge 24/7 solar PV + battery storage project in Northern Australia, with power delivery via HVDC cables, is starting to look as if it will happen.
All over Asia countries that were contemplating cheap LNG-based power generation are thinking again in the light of huge price hikes. The Philippines has been moving towards a massive adoption of LNG, but this is being reconsidered in view of massive price increases in the past 12 months.
A recent report from IEEFA (“The economic case for LNG in Asia is crumbling”) indicates that countries throughout Asia are rethinking their energy development plans towards locally produced renewable power. High prices and unreliable supply of LNG are central to the new thinking. The report suggests that this reconsideration of LNG has implications not only for adoption of LNG in Asia, but more generally for new LNG export infrastructure in the US and elsewhere. In the first 7 months of 2022 LNG imports in Asia have fallen by more than 6% and the IEA expects natural gas demand to fall substantially from that projected even quite recently, with 60% less demand growth through 2025. This is happening at a time of falling renewable energy costs and integration of renewables into 24/7 power provision.
Natural gas is not a clean transition fuel
There is a lot of misinformation about the emissions involved with natural gas exploitation, with some major groups such as the EIA (US Energy Information Administration) claiming that natural gas is a relatively clean fossil fuel. It is becoming clear that this view of natural gas as a “clean fuel” results from industry successfully focusing on just the actual combustion of the fuel (which is less CO2 emissions intensive than burning coal or oil) and ignoring large emissions due to methane escape in the harvesting and transport of the natural gas.
Emissions intensity is becoming a big deal concerning the social licence about the burning of fossil fuels and this is seen to include the whole cycle, not just combusting the material.
The fact that XOM CEO Darren Woods raised the possibility of XOM helping Germany getting fracking going (fracking has been banned in Germany since 2017) indicates how far away he is from the reality of 2022 and the discussions about decarbonization, notwithstanding that some groups in Germany are seeking to undo the ban based on the shortfall of Russian natural gas supply. Here are Darren Woods own words on Q2 Q&A “…the potential that we see for fracking and unconventional gas in Germany. I think the industry has proven over the years that unconventional gas can be produced safely and you then have a secure source of supply and economically and reliable source of supply. And so I think there’s an opportunity where certainly, Exxon Mobil could play a key role.”
Optimising renewables grid management
If you see your competitive edge as a hydrocarbons business, perhaps it is understandable that you might discount renewables because they are intermittent so who cares?
I pay attention to what is happening in the energy sector and I see a very different energy world emerging, one in which fossil fuel contribution is rapidly diminishing. Renewables plus battery storage and smart energy management is now producing 24/7 power provision both at the microgrid level and also at scale.
An interesting perspective from Fluence (FLNC) VP Growth & Head of Commercial, Kiran Kumaraswamy, on how the company thinks about battery business and making grids more efficient is provided in this link. In particular this involves not only providing 24/7 power from renewables plus battery storage, but also integrating long duration storage. This is dangerous stuff for Exxon Mobil as it is a big threat to use of natural gas for power generation (including peaker plants). Kiran Kumaraswamy makes the point that the Inflation Reduction Act 2022 has effectively doubled the US market for standalone energy storage overnight from 70-75 GW previously to now 140 GW. He says that this puts the market in a position that no one anticipated and is a really major opportunity.
The reason I’m focused on these kinds of stories is that companies like Fluence are at the sharp edge of threats to natural gas peaker plants. Exxon Mobil acts as if this isn’t happening.
When your own industry pivots
You know that change is coming when major parts of your own industry changes sides. It has been obvious for some time that European oil & gas majors are attuned to the dramatic need to exit fossil fuels. The major US companies, especially XOM but also Chevron (CVX), have been clear that they are not for turning, showing distain for the pivot towards renewables by companies like Shell (SHEL), BP (BP) and TotalEnergies (TTE). Initially it was more about talk than action, but increasingly substantial investments are being made.
A recent example concerns a JV project by Shell/Ampyr Energy (Australian arm of Singapore-based Ampyr Energy) to develop a large battery (0.5GW/1GWh) facility in NSW Australia to be used to smooth the grid. Shell will have the right to store and dispatch energy from the BESS system, It will complement nearby renewables projects (both solar PV and wind). This is NSW’s first REZ (Renewable Energy Zone) and it is known as the Central-West Orana REZ. The claim is that this zone will unlock 3 GW of new network capacity (enough to power 1.4 million homes). The REZ involves connection to the existing grid. A broader tender involves other parts of NSW with a goal of supplying 12 GW of renewable energy and 2 GW of long duration energy storage.
The above project is just one of several projects announced recently in Australia. Each time a large renewable energy project with battery storage gets approved, this means less requirement for fossil fuel energy, including backup power through gas peaking plants. Australia is a post-child for the fossil fuel industry, yet the current plans indicate that the Australian grid could be 91% renewable by 2030.
Investment in renewables in 2022 projected to exceed that on oil & gas
A critical issue for the oil & gas industry is the need for continued investment as oil & gas assets decline. This means constant new discovery and development of the assets. The tide is shifting for this investment and the European oil & gas majors are moving from token investments in renewables to these becoming dominant in the energy sphere.
Indeed a recent report from Rystad Energy indicates that 2022 is the year when predicted renewables investments ($494 billion) will exceed oil & gas ($446 billion) investment. The extraordinary thing is that some wind and solar PV projects in Europe now have payback periods of less than 12 months! A fossil fuel-based power plant needs fuel every day, while a renewables project doesn’t. The cost is in building the resource. A payback of 12 months in some European countries is extraordinary. Admittedly this has come about because of the dramatic increase in fossil fuels prices due largely to the Russian invasion of Ukraine, but it clearly represents opportunity for cheap power delivery that doesn’t depend on a risky foreign power.
Exxon talks up its initiatives to reduce greenhouse gas emissions by more than $15 billion over the next 6 years, but the spend mentioned involves scaling up on carbon capture and storage (see below), hydrogen and biofuels.
What can Exxon Mobil do about the above?
The European oil & gas industry has got the message and while action is delayed in the hope that oil & gas can keep getting exploited for some time, real investments are being made in the transition by the European oil & gas majors. This is not happening with Exxon Mobil.
Exxon Mobil has decided that it can address the issue above by finding ways to mitigate emissions, despite that there is no evidence that emissions can be mitigated in any meaningful way.
Carbon Capture and Storage (CCS)
I’ve written at length about CCS in earlier Seeking Alpha articles. A recent study from the Melbourne, Australia-based Global CCS Institute talks up the number of commercial CCS projects in the 2022 pipeline. The number seems impressive with a pipeline of 196 projects, but the detail indicates 30 in operation, 11 under construction and 153 in development. The growth in potential CCS capacity is up 44% in the past 12 months to be 244 million tons annually. However the reality is that this is less than 1% of annual greenhouse gas emissions.
To mirror the marginal scale of CCS, Exxon recently made a big deal of a CCS project in Louisiana, which is its largest commercial agreement to capture and permanently store up to 2 million tons of CO2 annually. This amounts to less than 1% of the abovementioned pipeline of CCS projects that the Global CCS Institute announced recently. Thus in terms of released CO2, the Exxon project amounts to less than 1% of annual CO2 emissions. It is such a small amount that is of no significance to the urgent need to reduce emissions. There is no evidence that rapid scale up of CCS is feasible and certainly it is not cost effective when renewables projects cost less than to run a fossil fuel power plant.
Conclusion
Denial and technology solutions to capture emissions are clearly not an answer to the looming crisis that confronts XOM, even though today there are rivers of cash coming into the business. Exxon is still working on dramatically expanding its oil & gas production at a time when dramatic emissions reductions are seen as needed. Eventually reality will intrude and it won’t be pretty. XOM needs a future plan that takes account of the urgent climate crisis that is biting all over the world in 2022. Dividend investors might consider whether the current situation for XOM is a brief moment of euphoria as the enormity of a once in a century energy transition away from fossil fuels begins to bite.
I am not a financial advisor but I pay close attention to huge changes as the world begins to address the climate crisis by exiting fossil fuel use. I hope that my comments provide some insight as you and your financial advisor consider investment in Exxon Mobil.
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