by Steve St. Angelo, SRSRocco Report:

There’s trouble brewing in the U.S. largest oil company while most investors remain in the dark.  ExxonMobil added a record number of wells in the Permian during the first three quarters of 2019, only to see the company’s oil production plateau.  What a difference in a year when Exxon bragged that its Q4 2018 Permian oil production had surged 93% from the same period in 2017.

However, an investor reading ExxonMobil’s latest presentation would believe the company’s Permian oil production continues to increase significantly by the announcement that output is up 72% since Q3 2018.

Let me explain how these oil companies “BUFFALO” investors with the numbers.

First, the nice chart above is stated in Koebd, or 1,000 barrels of oil equivalent per day.  Exxon’s Permian production shown in that chart includes natural gas.  So, unless you do a bit of digging and research, the typical investor will believe that Exxon’s Permian oil output continues to surge higher in 2019.

Second, while Exxon’s Permian production continues to increase in 2019, the majority of the gain is from natural gas. According to Shaleprofile.com, Exxon’s Permian oil production rose slightly since January, but natural gas was the clear winner.

(charts from Shaleprofile.com)

Third, ExxonMobil added 133 wells from Jan-Aug 2018 to increase overall Permian oil production by 84%. However, when ExxonMobil added 149 wells from Jan-Aug 2019, oil production only increased by a mere pittance of 3% during the same period. The reason for the plateauing of Exxon’s Permian shale oil production has to do with the massive decline rate taking place in its 2018 production.

We can see this occur in glorious 3D Technicolor in the chart below:

Exxon’s Permain 2018 oil production is displayed in the light blue color. At peak production in December 2018, Exxon’s Permian oil production reached 148,734 barrels oil per day (bopd) and then declined 41% to 87,154 bopd by August 2019.  Again, this is just 2018’s production declining over the eight months… it doesn’t include 2019’s production.

So, ExxonMobil had to make up that 61,580 bopd decline with its new wells added in 2019.  You will notice the 2018 decline rate is much more severe than the 2017 (orange color) decline rate.  This is the BIG PROBLEM facing ExxonMobil and other oil companies trying to outrun the industry’s KILLER annual decline rate.

IMPORTANT NOTE: The production data shown above from Shaleprofile includes that portion for Royalty owners.  According to the industry standard, about 20% of the production goes to Royalty owners, while 80% is published in the companies’ press releases and SEC filings.

Regardless, ExxonMobil spent a Boatload of CAPEX in the Permian in the Q3 2019, only to see its oil production increased slightly.  Although, as shown in the chart above, the real winner was the increase in natural gas.  Unfortunately, natural gas in the Permian isn’t fetching a good price, and a lot of the companies are flaring a bunch of it high into the Tehas blue sky.

Rystad Energy claims the companies in the Permian are flaring about 750 MMcf of natural gas per day during Q3 2019.  Shaleprofile shows approximately 12,300 MMcf per day of total production.  Thus, these companies are flaring about 6% of their production into THIN AIR very day… LOL.  Also, I would imagine that 750 MMcf flaring figure is understated.

Shale Continues Gut ExxonMobil’s Balance Sheet

ExxonMobil spent $3 billion on its U.S. upstream (oil & gas wells) CAPEX to make a lousy $37 million in earnings. Now, compare that to the $2.8 billion of CAPEX spent on the company’s International Upstream sector to receive $2.1 billion in profits.  Of the total $2.17 billion of ExxonMobil’s Q3 Upstream Earnings, the U.S. sector accounted for 1.7% of the amount.

Here is a chart comparing ExxonMobil’s 2018 U.S. Upstream Earnings and CAPEX versus YTD 2019.

Last year, ExxonMobil invested $7.67 billion of CAPEX on its U.S. Upstream sector while earning $1.7 billion.  In the first three quarters of 2019, ExxonMobil spent $8.8 billion in CAPEX to earn $468 million.

ExxonMobil Earnings vs. CAPEX 2018 & YTD 2019

ExxonMobil 2018 Earnings to CAPEX ratio = 23%

ExxonMobil YTD 2019 Earnings to CAPEX ratio = 5%

Of course, the lower oil price is also negatively impacting ExxonMobil’s earnings. Still, the Senior VP of the company stated earlier this year that they could make money at $35 a barrel in the Permian.

ExxonMobil’s investments in the Permian Basin are expected to produce double-digit returns, even at low oil prices. At a $35 per barrel oil price, for example, Permian production will have an average return of more than 10 percent.

Well, I am no financial genius, but ExxonMobil received an average $54.51 a barrel in Q3 2019, but only made $37 million of earnings on selling 60 million barrels of oil.  Where are the double-digit gains??

At some point, ExxonMobil investors are going to tell management to forgo shale and focus back on projects that make money… which aren’t many.  Currently, ExxonMobil reported $4.5 billion of Free Cash Flow Q1-Q3 2019.  However, the company paid out $10.9 billion in Shareholder dividends.  Thus, ExxonMobil had to borrow (or sell assets) worth $6.4 billion just to cover its dividend payouts.

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