Exxon Mobil And Short-Term Threats

Summary:

• The US government has a (non-binding) 2035 target for 100% clean electricity by 2035. Things are changing fast and this impacts use of natural gas for making electricity.
• A barrel of oil is primarily used to make gasoline (49%) and diesel (26%). Electrification of wheeled transport means a substantial decline in the use of these fuels.
• Exxon’s oil and gas products are under threat now from replacements that don’t rely on fossil fuels. Oil prices are very supply/demand sensitive, changing dramatically with a small percentage change.
• Climate-related issues involve massive flood-related losses in major food production areas in Pakistan, Africa, Italy and California. This provides new impetus to decarbonize.
• The rapid exit from fossil fuels and climate-related food losses are neglected but near-term issues making investing in XOM risky.

I’m very focused on the oil and gas industry and especially Exxon Mobil (NYSE:XOM) because this industry is at the start of its ending and this provides opportunity for investors interested in what comes next. A key part of the puzzle for investors like myself interested in renewable energy and the electrification of transport is timing. Just about all experts acknowledge that the world must decarbonize, but the pace of this change is critical. If it’s decades away, as many investors and Seeking Alpha authors believe, then there’s a future for investment in Exxon Mobil while renewables and electric car companies have less short-term upside. On the other hand if the pace of change is quickening, this triggers concern about new investment in or holding onto XOM shares. I last wrote about the pressure of change six months ago. Here I expand on my perspective which is another view to that provided by many recent authors covering XOM. I think that XOM is threatened by two rapidly-accelerating threats, firstly from the rise of renewable energy and electrification of wheeled transport (which includes diesel trucks). Secondly, the concerns about climate change and hence need to decarbonize are accelerating. My take is that XOM management underestimates the pace of exit from fossil fuels and the extent to which climate change is forcing action, especially in relation to food security threats. I suggest that now is not a time to invest in XOM and existing shareholders might consider whether their cash is better exercised on other investments. I note that the XOM share price of $102.18 is up just 6.4% year on year and down 8.2% in the past six months, after a dramatic run-up as the global economy came out of COVID and was dramatically positively affected by the Russian invasion of Ukraine.

Exit from fossil fuels due to competition from low carbon technologies

Darren Woods is the CEO and Chairman of the XOM board, so he exercises a lot of power. It’s therefore of interest to hear from him about the threat to his oil and gas business from power generation through renewable energy and the electrification of transport.

Darren Woods on power generation

Darren Woods continues to obfuscate about the dramatic growth of renewable energy (solar and wind powered electricity generation plus storage) by denying that it’s relevant because it’s ineffective. He’s yet to acknowledge that 90% of new power generation now comes from renewables, not fossil fuels. This is a big deal for natural gas because every new solar PV and wind facility provides ongoing power supply. This is a competition with coal and natural gas that the renewables industry is winning. Of course there’s a big focus on managing intermittency as grid providers engage with US Federal Government goals for 100% renewable electricity by 2035.

This is a global story. Singapore is an example of a country that currently relies almost entirely (96%) on a combination of LNG (liquid natural gas) and natural gas. It has recognized that being so dependent on natural gas at a time when natural gas/LNG prices went crazy is a big issue. Singapore recognizes that it doesn’t have the space for major renewables expansion and it’s evaluating importing renewable power from various Asian countries. Recent news is that Singapore is locking in import of 1 GW of renewable power from Cambodia. Australia also is in the mix with the 20 GW solar Sun Cable project, after some setbacks, now competing for 24/7 supply of up to 15% of Singapore’s electricity needs. The Philippines also is having a rethink about energy with major increase in renewable energy targets (to 50% by 2040).

There’s a major difference between investment in oil and gas and renewable energy. Oil and gas needs constant investment to find and develop replacement resources as existing facilities get depleted; the actual harvesting and transport of fossil fuel is costly. Renewables on the other hand require investment to capture the energy (solar panels, windmills), manage intermittency with batteries and make grid connections, but once this is done the energy is supplied essentially for free for 20 years. I note that the cost of building solar PV with battery storage is now cheaper than the annual cost of running an existing coal power plant.

Darren Woods on electric vehicles

Exxon CEO Darren Woods’ strategy regarding electrification of transport has been one of denying what is happening, even as he has needed to substantially change his position over recent years. Four years ago Woods made news at an Oil & Gas Climate Initiative meeting when he claimed that he didn’t see the point of BEVs (Battery Electric Vehicles) because they would be effectively fueled by coal used to generate the electricity. Last year Darren dismissed that complete electrification of cars will impact its business, based largely on his view that Exxon’s chemicals business and heavy industry transport fuels (diesel) will take up the slack. He also thinks that biofuels will have a big role. The challenge here is that all Internal Combustion Engines are headed for the exit. This includes industrial use.

A quick look at how the global website of XOM presents personal transport growth indicates the curious way that the company presents the future. The headline stuff is all about vehicles with engines and it is of interest that there’s a focus on the world’s fastest developing market, Asia. Here’s a quote from the section addressing the Asian market: “Asia’s love of cars is evolving into the hottest market in the world, and as that trend matures, so too will the technology driving new efficiencies. In fact, through 2040, the region will see the largest growth in access to cars, driving a huge demand not just in the fuel pumped into their tanks, but also the materials to produce them.” I’ve emphasized the way that the Asian market is presented as an ICE (Internal Combustion Engine) market… “fuel pumped into their tanks.”

The point is that this year in China 24% of new car sales are BEV (Battery Electric Vehicle). Even on the XOM website it’s acknowledged that by 2040 there may be 420 million electric vehicles on the road.

The surprising thing is that Exxon management seems to think that there’s something magical about commercial vehicles using diesel. They’re betting that diesel engines will make up for the engines using gasoline. The point is that cities all over the world are banning diesel-engine commercial vehicles now and electrification of commercial vehicles is well advanced, not forgetting that this goes all the way up to Tesla’s recently released 80 ton Semi BEV. Here are the facts from the EIA: 49% of a barrel of oil is used to make gasoline, while a further 26% is used to make distillate (diesel and fuel oil). Both of these products have no future when the ICE (Internal Combustion Engine) stops being manufactured (soon). 8% of a barrel of oil is used to make jet fuel. The remaining 17% is produced for a variety of purposes, including petroleum coke, hydrocarbon gas liquids, asphalt, petrochemical feedstocks, lubricants.

XOM makes no comment about what the end of transport fuels would mean for oil refining. According to Michael Cembalest (in JPMorgan’s 2023 Eye of the Market 13^th Annual Energy Paper “Growing Pains: The Renewable Transition in Adolescence”) significant reduction in gasoline and diesel production would be a big deal for refiners as they have a limited capacity now to change the composition of refined products. It’s expensive to switch to other products. It will mean a big change for refiners!

XOM is acting like it’s in a business that has a long future

Regarding where energy investment is going, an interesting perspective comes from a recent IEA report on the balance between investment in fossil fuels vs. clean energy. In 2023 the IEA reports that $US 2.8 trillion is expected to be invested in energy, with $US1.7 trillion invested in renewables and $US1.0 trillion invested in fossil fuel-based energy. The figure that got my attention is that this means that 90% of new investment in power generation will be in renewables. This reflects that almost all of the investment in fossil fuels is in extracting the fossil fuels (i.e. maintaining the status quo). The point is that each new solar or wind facility means 20 years of new power at minimal cost. This has to impact on fossil fuel-based power generation, which is falling short of replacing existing capacity. Most of the huge profits made by oil and gas majors as a result of the Russian invasion of Ukraine has gone into debt repayment, dividends and share buybacks.

XOM is engaged with a lot of strategic stuff at the moment, selling off assets that have costly production to focus on the Permian and Guyana expansions… more cash (what will they do with it?). Management is very cautious about increasing the dividend because they know that tricky times are ahead. As I’ve shown in the article I don’t think these tricky times are restricted to business cycles like recession etc. The change is much more fundamental and it’s reaching a crisis.

A key issue concerning the climate change story is the absence of discussion about the consequences of not taking action. The IEA provides a lot of detail about the consequences of different levels of emissions reductions, but there’s a huge gap in the story because the IEA provides no guidance about the costs of inaction. If the IEA provided information about the consequences (costs) of different strategies, this might compel decision makers (and investors) to think differently. A big mantra from Woods is that he doesn’t believe that society will accept the (as he sees it) worse economic outcomes of abandoning fossil fuel exploitation. The point is that continuing fossil fuel exploitation has huge economic and social costs. Exxon is the leader among the oil and gas majors that aggressively continues with its determination to expand oil and gas production, while proudly claiming reducing scope 1 and 2 emissions (those coming from harvesting the fossil fuels). The point is that in the process scope 3 emissions are massively expanded. Scope 3 emissions are overwhelmingly responsible for global warming.

Recently Exxon made clear that it thinks it can get away with ignoring the global efforts to address emissions leading to global temperature rise, with a key reason being that it doesn’t believe that the world is on target to address emissions.

The May 2023 G7 Hiroshima meeting made clear that key governments take very seriously the need to seek to minimize further emissions causing accelerating global warming.

Some key issues

In building models, one needs to make choices about what is in the models. XOM makes some curious assumptions that don’t stand scrutiny.

XOM talks up carbon capture and storage – CCS

Given that there’s no evidence that carbon capture has the capacity to make a meaningful contribution to emissions caused by burning fossil fuels, I find it extraordinary that this line is taken seriously. XOM’s own goals for CCS are laughable in the context of actual emissions being produced. The only area where carbon capture is used at scale is for enhanced oil recovery where CO2 is injected into wells nearing exhaustion to enhance oil and gas recovery. What’s ignored in relation to these activities is that the CO2 is not stored, but it’s part of the vehicle for recovering the oil and gas (i.e. a lot of it comes back out!). Carbon capture is an additional cost to burning fossil fuels, which already are more expensive than renewables. How do you capture the CO2 from ICE vehicle exhaust?

XOM uses the IEA as cover for its assumption about the importance of CCS. The IEA assumptions about CCS relate to a fossil fuel-based view of the world’s energy and transport rather than any serious examination as to whether CCS has the capacity to become a viable source of carbon reduction. Note that the investment in CCS is small change compared with upstream investment in oil and gas harvest.

New evidence concerning urgency in addressing climate change: Food security

I pay attention to the climate issues and how they might impact fossil fuel investments. Until quite recently the most impactful result of the climate emergency focused on things like coral reef survival and other iconic things that some investors (not me) might dismiss. It’s very clear that the Great Barrier Reef is doomed and indeed virtually all coral reefs have no future. If you want to see what a coral reef looks like, go now.

In the past 12 months I’ve become aware of a much more confronting reality to climate change. This is an issue that can’t be ignored and it’s today’s issue. This concerns food security. The thing is that warmer oceans and atmosphere means more energy in storms and a lot more water. Hence flooding on a scale that’s unprecedented is now occurring all around the world. This is happening everywhere, including close to where I live, where the local pub had water up to the ceiling in a recent flood, something which has never happened before. The thing is that in 2022 Pakistan experienced flooding on a catastrophic scale, which dramatically impacted Pakistan’s food crops. A similar story is emerging in Africa.

The same thing is happening now in California. I suggest that these issues are really confronting for governments as losing annual crops is a big deal. Note that California has gone from dealing with severe drought to massive floods in a matter of months. This is a major food bowl for the US worth $51.1 billion in 2021. The California Department of Food and Agriculture is well aware of the climate risks to California’s agricultural production, with reports covering different aspects of climate risks going back a decade. However the recent events of 2022/2023 are different in that they foreshadow massive crop losses.

The latest area to be affected by unprecedented flooding is northern Italy. It is a similar story to California with huge losses to productive agricultural areas.

Indeed the recent G7 meeting in Hiroshima had food security as one of its key action items (Hiroshima Action Statement for Resilient Global Food Security).

XOM’s view about the need to decarbonize

A powerful series of statements as to how XOM views the above issues is given in today’s 2023 Annual Meeting Proxy Statement. There are 13 shareholder proposals seven of which address how XOM approaches the need for global decarbonization. The XOM Board recommends that all shareholder proposals be rejected, with a significant reason for this being that current global efforts to decarbonize are not on track to succeed. The linked document provides a lot of information that makes clear that XOM sees itself as a fossil-fuel based business and on that basis it intends to keep producing and expanding its oil & gas production, regardless of the climate consequences. The question is how much longer this approach, which has largely been abandoned by European oil and gas majors will be allowed, noting the massive costs being incurred by humankind as a result of climate change induced disasters.

Conclusion

There’s a lot of change in the wind when one considers the oil and gas industry. The world is decarbonizing power and electrifying wheeled transport. These two zero carbon technologies are a big risk to oil and gas companies, especially those like Exxon Mobil, whose business plans focus on substantially expanding oil & gas production.

In China, the world’s biggest car market, 24% of new car registrations so far in 2023 are BEVs. The time when electrified vehicles will impact gasoline consumption is coming fast. Remember 75% of each barrel of oil ends up as gasoline or diesel. Even a small percentage decrease in oil consumption will have an impact. A similar argument concerns the threat to the use of natural gas in power generation in competition with renewables.

It’s clear that currently Exxon Mobil management doesn’t accept that the above developments are going to impact the company over the next decades. It simply denies the dramatic changes, or in the case of electrification of cars it indicates that commercial transport (diesel powered) will make up the shortfall as the BEV takes over car transport. Exxon overlooks the fact that diesel is under threat from BEV commercial vehicles, all the way up to the 80-ton Tesla Semi.

Exxon is refusing to examine the effect of net zero by 2050 because it doesn’t think that it will happen. It argues that people will keep on using fossil fuels because they won’t accept a lower standard of living. This position assumes that energy equates with fossil fuel use, at a time when it’s clear that other means of power and transport are replacing fossil fuels. The interesting point is that Exxon still thinks it is in control at a time when European oil and gas majors accept that they have to change. The latest investor activism (and government actions) make clear that Exxon management is out of step with what’s happening in 2023. The new threats to food security are a significant wake-up call. I argue that this will not be without consequence for Exxon.

I’m not a financial advisor but I follow closely the dramatic changes as power and transport become electrified. I hope that my comments about Exxon Mobil’s role in these decarbonization efforts provide a different perspective that might be of help to you and your financial advisor in deciding about investment in Exxon Mobil.

---

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

---