Can Hurricane Harvey Impact Exxon Mobil’s Value In The Long Term?

by Trefis Team
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The problems of the world’s largest publicly traded oil company, Exxon Mobil (NYSE:XOM), do not seem to be coming to an end. While the volatility in commodity prices had kept the company on its toes over the last three years, the recent Tropical Storm Harvey has further added to the company’s miseries. The hurricane, that struck the Gulf Coast about a fortnight ago, resulted in the shutdown of a number of refineries in the region. Exxon Mobil, which has two of its largest refineries – Baytown and Beaumont – in the storm affected area, was forced to curtail their operations in order to mitigate the damage caused by the incessant rains. Investors were quick to react to this news, causing the company’s stock to plunge almost 5% in the last one month. However, in our opinion the event is temporary and should not impact the long term value of Exxon Mobil.

Source: The Wall Street Journal

Here’s why we believe that the market reaction to the natural calamity was unwarranted.

Exxon Mobil’s downstream operations, largely refining, have accounted for almost 70% of its top-line over the last few years. However, they have contributed only 17% of its total EBITDA on an average in the last three years. Accordingly, we forecast that the company’s downstream operations constitute a little over 7% of its total valuation.

Now, Exxon has a total global refining capacity of 4.9 million barrels of oil per day (bpd), of which the Texas Gulf Coast shutdowns represent about 20% of its total downstream refining capacity. Interestingly, Exxon’s Baytown refinery in Texas, which is the second largest refinery in the US, has resumed operations six days after its closure due to heavy rains. Also, if the situation improves at the current pace, the Beaumont refinery, with a capacity of 362,300 barrels of oil per day (bpd), is likely to come online soon.

Assuming that Exxon’s 20% refining capacity remains closed for about 10 days (on an average) due to the impact of Hurricane Harvey, it would result in about 9.8 million barrels of oil being removed from the company’s total refining production. This seems to be a rather meager number in comparison to the company’s total refining capacity. Thus, while we believe that the closure of Exxon’s refineries is likely to negatively impact the oil major’s third quarter results, it is unlikely to impact its long term value.

In addition to this, Exxon has shown solid resilience in this ongoing commodity slump. Despite the weakness in commodity prices, the company managed to double its earnings to $3.4 billion in the 2Q’17. Further, the oil and gas producer generated cash flows of $7.1 billion from its operations and asset sales, which more than covered its dividends and net investments, with an excess of nearly $800 million. Also, despite being the largest integrated energy company in the world, the company has the lowest leverage among its peer group, with the best credit rating. This gives the company an option to raise additional debt to service its capital spending and dividend needs (if needed) and still maintain investor confidence in its operations.

Lastly, Exxon has a strong pipeline of projects that are underway and are expected to drive its value in the long term. For instance, the company is operating in two of the most economical oil plays in the Permian Basin – Midland Basin and the Delaware Basin – where the unit development cost is around $7 per barrel. The company is currently operating 16 rigs in the region and is producing more than 165,000 barrels of oil equivalent per day. Going forward, the company expects to increase the activity in this region and add another 3 rigs by the end of the third quarter.

Additionally, Exxon acquired new high-quality acreage in offshore Australia, Equatorial Guinea, and Suriname. Also, the company made a final investment decision (FID) to proceed with the first phase of development for the Liza field, located offshore Guyana. The Phase 1 will have a production capacity of 120,000 barrels per day, with a unit development cost of under $10 per barrel. This will allow Exxon to generate double-digit returns from this project, which will boost its value in the long term.

Thus, based on the discussion above, we believe that Exxon Mobil has an excellent portfolio of projects, and a strong balance sheet that will drive its value going forward. Hurricane Harvey might act as a speed-breaker for the company but will not be able to slow down the pace of its future growth.

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