When Russia invaded Ukraine nearly a year ago, few people would have imagined that the disruption of oil and gas supplies would push the fossil fuel sector to historical highs. In fact, shareholders were more concerned about the hefty charges and writedowns that multinational oil and gas companies might be forced to take on their Russian investments. And, their worst fears came true soon enough.
On February 27, 2022, just days after Russia invaded Ukraine, British energy giant BP Plc. (NYSE: BP) announced that it would exit its 19.75% shareholding in Rosneft PJSC and its other business in Russia, becoming the first international company to do so. BP certainly paid a heavy price for the bold move: the company took a massive post-tax charge of $24.4 billion in its 1Q 2022 results, the largest such impact on any company globally.
Other multinationals soon came under intense pressure from investors and consumers to exit operations, sell businesses or write down their investments in Russia.
But few suffered a fate worse than that inflicted on America’s largest oil and gas company: Exxon Mobil Corp. (NYSE: XOM). In early March, Exxon announced plans to terminate its 30% stake in Sakhalin-1 project in Russia's Far East, stating: "We deplore Russia's military action that violates the territorial integrity of Ukraine and endangers its people."
Sakhalin-1 was a hugely complex operation that produced ~227,000 barrels a day, and was regarded as an engineering marvel when it first started pumping in 2005 even setting records for the longest wells ever drilled. The Kremlin blocked the Texas oil giant from exiting Sakhalin-1, leading to ExxonMobil sending a “notice of difference” to Russian authorities on August 1.
Then, in October, Exxon announced that President Vladimir Putin had expropriated its properties despite seven months of discussions over an orderly transfer.
“With two decrees, the Russian government has unilaterally terminated our interests in Sakhalin-1 and the project has been transferred to a Russian operator. We have safely exited Russia following the expropriation,” an ExxonMobil spokesperson said in a statement.
In other words, Exxon received zero compensation for its Sakhalin-1 investments valued at more than $4 billion.
Blessing In Disguise
But maybe Exxon CEO Darren Woods should send a big merci beaucoup to Putin because his blatant kleptocracy has turned out to be a blessing in disguise for Exxon Mobil. The company posted its best year on record in 2022, with amazing growth stats on virtually all important metrics. Here are Exxon Mobil’s Key Financial Results for FY 2022
- Revenue: US$402.2b (up 44% from FY 2021).
- Net income: US$55.7b (up 142% from FY 2021).
- Profit margin: 14% (up from 8.3% in FY 2021) with the large increase in margin driven by higher revenue.
- EPS: US$13.26 (up from US$5.39 in FY 2021).
- $76.8 billion of cash flow from operating activities up from $48 billion in FY 2021 including a period-end cash balance of $29.7 billion.
- Increased and extended its share-repurchase program with up to $35 billion of cumulative share repurchases in 2023-2024.
- Improved its net-debt-to-capital ratio to ~5%, reflecting 2022 debt retirements of $7.2 billion.
Last year, the company was able to increase year-over-year Guyana and Permian production by over 30%, with overall production up 100,000 barrels of oil and gas a day over a year ago to 3.8m barrels a day. Exxon is now able to leverage its copious cash flows to further develop key oil and gas fields.
Its Guyana assets continue to be incredible: three months ago, Exxon announced that it had made two more discoveries at the Sailfin-1 and Yarrow-1 wells in the Stabroek block offshore Guyana, bringing discoveries on the block to more than 30 since 2015. Exxon revealed that the Sailfin-1 well was drilled in 4,616 feet of water and encountered 312 feet of hydrocarbon-bearing sandstone, while the Yarrow-1 well was drilled in 3,560 feet of water and encountered 75 feet of hydrocarbon-bearing sandstone.
The company says it has ramped up development and production offshore Guyana at a pace that "far exceeds the industry average”. Exxon’s two sanctioned offshore Guyana projects, Liza Phase 1 and Liza Phase 2, are now producing above design capacity and have already achieved an average of nearly 360K bbl/day of oil. The supermajor expects total production from Guyana to cross a million barrels per day by the end of this decade.
Exxon said a third project, Payara, is expected to launch by year-end 2023 while a fourth project, Yellowtail, could kick off operations in 2025. Exxon is the operator of the Stabroek block where it holds a 45% interest while partners Hess Corp. (NYSE: HES) and Cnooc (OTCPK: CEOHF) hold a 30% and 25% interest, respectively.
The best part: XOM stock has rocketed 50% since the invasion, adding nearly $160 billion to the company’s value.
With its vastly improved balance sheet, Exxon Mobil might now decide to go for the low-lying fruit: a big acquisition. If that sounds absurd or far-fetched, consider that Last month, Citi said that the time might be right for a U.S. oil giant such as Exxon Mobil or Chevron Corp. (NYSE: CVX) to buy European energy giants such as BP Plc .(NYSE: BP), Shell Plc (NYSE: SHEL) and TotalEnergies (NYSE: TTE)--a trio Citi reckons is trading at a massive 40% discount.
"The prize for the U.S. IOCs would look considerable, with value uplift coming through the ability to fund at a lower [cost of equity] as well as cost synergies that we estimate in [net present value] terms in the region of 15%-30% of target market cap," Citi said.
The analyst says that European politicians are unlikely to directly oppose a sale due to the continent’s strong anti-oil sentiment and also noted that the European firms would not have to spend as much on low-carbon investments.
By Alex Kimani for Oilprice.com
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