By Investment Underground
The Delbrook Resource Opportunities Master Fund LP declined 4.2% in September, bringing the fund's year-to-date performance to 25.4%, according to a copy of the firm's September investor update, which ValueWalk has been able to review. Q3 2021 hedge fund letters, conferences and more The commodities-focused hedge fund has had a strong year of the back Read More
Exxon Mobil (NYSE:XOM) is the most widely recognized oil company in the world. By industry standards, it is a behemoth. The market cap of Exxon is $386.96 billion. By comparison, BP PLC (NYSE:BP) has a market cap of $121.61 billion. Royal Dutch Shell plc (NYSE:RDS.A) (LON:RDSA) (LON:RDSB) has a market cap of $206.94 billion. The Royal Dutch Shell plc (NYSE:RDS.B) equity “B” shares have a market cap of $214.16 billion.
Its many years dominating the traditional energy field have delivered solid performance to its investors. The world is rapidly changing. Given the vortex of geo-political strife in the Middle East and Africa, Euro-zone crisis, slowing growth in emerging markets and the domestic economic recovery moving at a snail’s pace, this is the only time in history that Exxon will have to carefully consider its next move in order to survive into the next millennium. Let’s face it this resource cycle is entering its august years only the very strong and the very smart will survive. Today, I am looking at what Exxon is going to do moving forward to survive in an environment of volatile energy prices and changing dynamics in alternative and renewable energy.
Years ago, Exxon refused to jump on the renewable energy bandwagon because first and foremost it is an energy company that has managed to make a profit from that business in times of high and low energy prices. Exxon can produce oil, natural gas and coal fired energy for much less than its competitors because of its size and corporate structure. Its operational facilities, building refineries and petrochemical plants operate as single units, whereas other producers run them as separate components.
Exxon Mobil (NYSE:XOM) is in the business of profit and its business practices have always been motivated by profit and profit only. It can produce profit from oil production but previously did not see the returns on capital from alternative energy. Subsidies for bio-fuel make the fuel viable but without subsidies it is not. Bio-fuel walks a thin line environmentally as it is very land intensive and reliant on chemical processing to be usable. Solar is still more expensive to produce than coal and gas fuelled plants. Wind power is difficult to scale to need. Hydro and biomass are clean and competitive but Exxon doesn’t build infrastructure or run farms.
In the past, Exxon was criticised for not having a plan to manage the impact of climate change and diminishing sources for the commodities. Exxon maintained that oil, gas and coal will remain the dominant energy sources into the next century. The company had no way to establish a clear profit strategy from alternative sources so it simply would not.
Exxon has opted to invest in the algae bio-fuels and put $500,000 into an investment in an electric car sharing program in Baltimore. Each of these actions came after a lot of internal research and development. In tipping its hat to the renewable and alternative sector, Exxon showed that it may have found a way to make a meaningful contribution to alternative energy sources and garner a profit somewhere down the road.
Exxon’s motive behind these moves is profit, either now or in the future. Royal Dutch Shell, Chevron Corporation (NYSE:CVX) and BP Plc (NYSE:BAC) have all invested in alternative energy, in particular algae for bio-fuel. Algae is seen as being more economically viable than other bio-fuels, it is not land intensive and it absorbs CO2, which could make it eligible for carbon offset credits.
This article from April of this year states that Exxon is involved in efforts to repeal renewable energy targets. This action is probably taken to mitigate the risk that traditional energy producers will be hit with higher tax and environmental imperatives in the coming years. This is not because Exxon sees alternative energy as a threat. Nor is it a reversal on its position of expenditures on research into alternative energy sources. Alternative energy is not a threat to Exxon, low oil prices are. It has taken near cataclysmic events to make demand for oil decrease to its current levels. Further decreases in demand and higher taxes and operating costs will erode the profit in Exxon. Lobbying for protection is all part of the game.
Exxon has invested a lot of time and money into the research of its future as an energy company. In its Outlook for Energy report Exxon outlines that through 2040, worldwide population and economic growth will drive consumption of energy higher but will use energy efficiently and will move toward using lower carbon emission fuel sources. Exxon believes that the desire for lower carbon fuels will see natural gas becoming the number two source of fuel and the demand for coal will decline after 2025. Exxon projects that natural gas, nuclear power and renewable energy sources will rise at a faster than average rate. Wind solar and bio-fuels will also experience strong growth with wind being the most rapidly growing energy source.
This report states that its research into alternative and renewable energy Exxon is not an academic exercise for Exxon. It invests billions of dollars in projects each year based on the Outlook for Energy forecasts and on behalf of its shareholders, has a huge stake in getting it right.
This is a very careful company that has to protect the culture of its brand and of its profit strategy. It has carefully and competently done this over the years, paid hefty fines for its mistakes, paid out dividends and engaged in share buybacks to keep investors happy. I think that if Exxon has taken steps to be in certain alternative energy sources, the chances of those sources being successful in the future are better than good.
In refusing to bow to popular opinion, Exxon may have made more than a few enemies and attracted the ire of environmental organizations, but it is coming around slowly. Change in direction for corporations is a process not an event. I don’t imagine Exxon’s management makes decisions sitting around a board room table made of ivory, on chairs made from the skin of humpbacked whales, wearing coats made from freshly clubbed baby seals and lighting cigars with $100 bills. For some investors it is very hard to walk the line between profit motivation and ethical investing. Again, Exxon is all about profit. As an investor after retention of capital, profit should be the primary concern. If you have a moral dilemma with it, stay out of Exxon.