Does #Exxon Know The Value of Its Assets?

by Matthew Johnson

In recent months, ExxonMobil has been under fire after investigative reporters claimed the oil and gas giant knew about risks associated with climate change since at least the 1970s and hid that knowledge from the public.  Leading environmental groups called for the company to be prosecuted the way tobacco companies were prosecuted for hiding Smoking risks.  Mainstream politicians like Hillary Clinton joined in and New York Attorney General Eric T. Schneiderman launched an investigation.  In March 2016, attorneys general from 18 jurisdictions announced they are now part of his effort. In September 2016, the Wall Street Journal reported that AG Schneiderman had changed his aim and is now looking more closely at how Exxon values its assets.  The federal government has also launched a similar effort.

In addition to climate questions, the government wants to know if Exxon is hiding the damage it has suffered from low oil prices.  As our proprietary data shows, frac jobs decreased 50% from Q42015 to Q12015, and that foretold a corresponding drop in production and cash flow.  ONE THING TO NOTE IS THAT PRIMARY VISION’S DATA FOCUSES ON NORTH AMERICAN FRAC’ING AND THE MAJORITY OF EXXON’S BUSINESS IS INTERNATIONAL/OFFSHORE.

The Good:

First off, ExxonMobil is a pillar of American industry that traces its lineage back to the Standard Oil Trust that dominated world oil markets in the late 1800s.  The company has survived a lot of legal issues in its past, and when crude markets rebalance (or if OPEC is able to boost oil prices) then Exxon’s troubles may disappear.
This particular controversy has to do with the process executives use to sign off on calling reserves “proven” after reviewing data from engineers, geophysicists, and geologists.  Dropping oil prices and costly regulations reduce the value of these “proven” resources.  Most companies will write down that lost value, but write-downs reduce profits.  Exxon is notorious for refusing write-downs.  Exxon CEO Rex Tillerson sees this aversion as a good part of the company’s culture.  He says it avoids write-downs by placing a high burden on executives to ensure that projects can work at low prices.  Those executives will not be “bailed out” by having their projects written down in a bad market.

One thing that helps make this strategy viable for Exxon is that its operations are heavily centered in areas that continue to be economic at current prices.  In particular, this means the Permian Basin in Texas, and through it subsidiary XTO Energy the company also reaches the Williston Basin in North Dakota.  Our data shows these to be the most popular locations for frac jobs in recent years.

The Bad:

The flip side here is that Exxon could be seen as lying about the cost of climate or its losses associated with low oil prices.  The company has outperformed many of its rivals since oil prices began to drop in 2014, but it has lost money in its U.S. drilling business for the past six quarters.  By failing to admit that their reserves had lost value, Exxon was able to report higher earnings than rivals that made significant write-downs.  Some may say the company inflated its earnings to boost its stock price.

The Ugly:

Exxon is now facing two different investigations with overlapping aims.  First, New York AG Schneiderman and his coalition are pursuing allegations of fraud related to climate change.  AG Schneiderman also appears to be independently reviewing Exxon’s practices related to writing down assets and accounting for the cost of climate change.  Second, the U.S. Securities and Exchange Commission has now opened up an inquiry into the same issues of write-downs and climate accounting.

Conclusion:

Exxon has been on the attack against AG Schneiderman and what the company views as a politically-motivated attack, but Exxon has said the SEC is the “appropriate entity” to look into these matters.  Exxon is proud of its practices and it will likely hold up against government scrutiny as it has for decades.  History suggests commodity prices will rise again, and when they do Exxon’s troubles will seem minor.  Moreover, these investigations were just a chink in Exxon’s armor.  Stock prices took only a small dip after the SEC investigation was announced, and analysts like The Street Ratings still consider the stock a “hold” as the company is in a solid financial position despite weak cash flow and poor profit margins.

sources:

Disclaimer
The data presented above has a margin of error of 5-8% as a result of E&P and/or service company errors or incorrect data filings. Neither the information, nor any opinion contained in this site constitutes a solicitation or offer by Primary Vision or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

Pioneer’s A+ game might match OPEC

PXD-PVby Matthew Johnson

Recently, we reviewed some pressure pumpers and even took a stab at Eog Resources (EOG: $91), often called the Apple ($108.27) of U.S. shale.  If Eog Resources is the Apple of U.S. Shale then is Pioneer (PXD: $224) the Uber-equivalent?  Their CEO, Scott Sheffield, stated last week that their operating costs in the Permian Basin were close to $2 per BOE. Some have disputed this by looking deeper into their financials.  Let’s take a look at what we’re good at which is frac jobs and frac spreads.

We’ve reported 440 frac jobs since the beginning of 2015 running through Q1 2016.  PXD has shown a steady flow of work.

FSC Charts for PXD - comparisonFSC Charts for PXD - month by month

Pioneer is vertically integrated, so they do a lot of their own pressure pumping. However, we are tracking some activity with Halliburton (HAL: $43.84), Baker Hughes (BHI: $49.76) and Schlumberger (SLB: $81.20) in the last 18 months.

Here’s their top ten frac jobs by county since January of 2015:

FSC Charts for PXD - top 10 countiesThe majority of their activity takes place in Midland (Permian), Upton (Permian) and Karnes (Eagle Ford) counties.

Pioneer has been a technological leader in many aspects of frac’ing including well selection, pressure pumping  and refrac’ing.  The inclusion of their own pressure pumping team gives them a logistical and financial advantage over 90% of E&Ps in the United States.  Even if their CEO is exaggerating, it appears as their operational costs have shined a light on investors (their stock is up 40% since January of this year) and other shale companies that the impossible is, in fact, possible.  If OPEC’s goal was to knock U.S. shale offline they may have won some battles, but companies like pxd are tenacious.  The war is far from over.

sources:
Arthur Berman at oilprice.comPioneers $2 Operating Costs: Fact or Fiction?
Rachel Aldrich at The StreetPioneer Natural Resources Stock is the ‘Chart of the Day‘”
Nicholas Chapman at Market RealistAnalyzing Pioneer Natural Resources Q216 Earnings

Disclaimer
The data presented above has a margin of error of 5-8% as a result of E&P and/or service company errors or incorrect data filings. Neither the information, nor any opinion contained in this site constitutes a solicitation or offer by Primary Vision or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

EOG is white hot!

EOG-Resourcesby Matthew Downes

Since January 20th, EOG Resources (EOG: $90.24) stock is up 50%.  We’re gonna look a bit deeper into this E&Ps activity levels and provide some additional analysis.

In the chart below we analyze their frac jobs from 2015 to current.  Since January of 2015 EOG has performed close to 700 frac jobs. It has the appearance of a roller coaster ride, but further analysis will show you that this is a company who squeezed every dollar and leveraged their technology for every single frac job. Patience and target well selection were key factors in 2015.

FSC Charts for EOG - comparisonMonth by Month:

FSC Charts for EOG - month by monthOver the same period EOG primarily worked with 4 pressure pumpers (in order):
1. Pumpco, a division of Superior Energy Services (SPN: $16.76)
2. Halliburton (HAL: $43.91)
3. Universal, a division of Patterson-UTI, Energy Inc. (PTEN: $19.77)
4. Baker Hughes Inc. (BHI: $47.71)

One more chart we thought was interesting to follow was their activity by county and state.

FSC Chart for EOG - top activity by counties

The majority of their activity takes place in Gonzales and La Salle counties in Texas.  This chart reflects activity in New Mexico, Texas, North Dakota and Wyoming.

The oil patch has seen a rash of bankruptcies over the last 24 months as the result of a downward pricing cycle. While you’d think this would be a company motto for all operators, EOG is targeting premium drilling properties with an after-tax rate rate of return of 30% which is outstanding. In a recent Forbes article they polled 18 analysts with 44% of them recommending a strong buy.

Frequently referred to as the Apple of all oil and gas, do you think EOG can continue to improve while the Oil markets fully recover?

sources
Bruce Kamich of The Street “EOG Breaks Out of an Impressive Base Pattern
Dividend Channel on Forbes “EOG Cross Above Average Analyst Target
Erwin Cifuentes of OilPrice.com “EOG Resources Boosts Fracking Plan by 30 Percent

Disclaimer
The data presented above has a margin of error of 5-8% as a result of E&P and/or service company errors or incorrect data filings. Neither the information, nor any opinion contained in this site constitutes a solicitation or offer by Primary Vision or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.