Predictions of an Energy Giant

Secretary of State Rex Tillerson’s alma mater, Exxon Mobile (XOM:  NYSE), is in the crosshairs of New York’s top prosecutor, Eric Schneiderman, over the company’s disclosures of risk related to climate change and environmental regulation.  Schneiderman claims Exxon has only paid lip service to environmental concerns and its accounting inadequate for the financial impact of greenhouse gas emissions and climate change in its business.  The U.S. Securities and Exchange Commission is already investigating Exxon for valuation of oil and gas reserves in line of crude prices and the impact of restrictions on carbon emissions.   Exxon is claiming the legal action is without merit and politically motivated.

Exxon Mobile has made a great show of its ‘concern’ for the environment.  The company appeared to have some sort of corporate epiphany in 2006, when the word “climate” appeared for the first time in the company’s annual report filed with the SEC.  There was one reference to “global climate change,” but only in a general context.  This was also the second year Exxon published its annual “Energy Outlook,” which in that year was more a celebration of demand for oil and gas than a thorough discussion of world energy needs.  The 2006 edition did include a table on global carbon dioxide emissions.

It was not until the 2015 annual report that Exxon began describing the financial impact of greenhouse gas emissions on its business operations, using what Exxon calls a “proxy price” for carbon.  It can be left up to Schneiderman’s office and the SEC to wage the battle over Exxon’s greenhouse gas accounting practices. 

It might be even more interesting to see how prescient Exxon’s economists and analysts really are about energy.  Following are some of the more interesting forecasts and predictions by Exxon Mobile from its historic Outlook for Energy.

2005  - Demand for oil will reach 335 million barrels per day by 2030, compared to about 85 million barrels per day in 2005.

               U.S. Energy Information Administration reported total world petroleum consumption was 98.30 million barrels per day in May 2017, well short of Exxon’s anticipated trajectory in oil demand.

               This mattered because Exxon Mobile’s capital spending plans could have been based on unreasonable assumptions for future demand. 

2006  -  Wind and solar forecast to supply 10.5% of total energy needs by 2030  

               In 2016, solar provided 1.8% of world’s total electricity consumption and wind provided another 3.7% for a total of 5.5%.  It appears both power sources are well ahead of expectations at the oil and gas giant.

               An underestimation of competition is also an issue in terms of the asset value.  The SEC is claiming Exxon Mobile’s assets cannot produce the income that was originally anticipated and the value of oil and gas reserves need to be written down.

2007  - Reductions in ‘energy intensity’ as measured by global energy demanded as a percent of global GDP from 2.5 barrels of oil equivalent to generate $1000 in GDP to about 1.25 barrels by 2030.

               Things have gone much better than Exxon expected.  In 2015, the Sustainable Engineering Lab at Columbia University estimated it takes about 1.15 barrels of oil equivalent to product $1000 of global GDP.

               This is more bad news for the income potential in Exxon’s oil and gas assets.  It cannot be blamed on unfair advantages of subsidies or tax breaks given to renewable energy sources.  It is tough to lobby against efficiency in the halls of Congress.

2008  -  Global demand for liquid fuels expected to increase from 86 million barrels oil equivalent to 116 million barrels in 2030.  Biofuels included as a source of liquid fuels for the first time.

               The U.S. EIA estimated the global demand for liquid fuels was about 97 million barrels per day in the first quarter 2017, suggesting Exxon’s numbers might be a bit light.

2009  -  Wind, solar, and biofuels will grow at approximately 10% per year through 2030.  Starting from a small base, the contribution by 2030 will remain small at about 2.5% of total energy.

               According to the Global Wind Power Council, wind power has been clocking annual growth rates in the high teens and low twenties for the past several years, bringing this renewable power source to 3.7% of total global energy supply.  According to U.S. EIA, world biofuels production increased 44% in the years between 2009 and 2015, for an annual average rate of 7%. 

               As the years have rolled by Exxon appears to be denying more than just climate change.  Even as recently 2009, the competitive impact of renewable energy is played down, at least publically.

2010  - Exxon’s analysts make a prediction of a world population of 8 billion by the year 2030, and declared that energy consumption is a function of human desire for a better life.

               In 2010, the world population was around 6.9 billion.  At the beginning of 2017, the estimated population s 7.6 billion, eating up more than half of Exxon’s prediction in just a third of the time.

               There appears to be a relationship between the exploitation of hydrocarbons and the explosion in human population.  The planet could not support nearly seven billion people without exploitation of fossil fuels.  Of course, Exxon would not make that connection in print.  Instead it appears population growth was underestimated even as its analysts saw burgeoning demand for oil and gas. 

2011  -  New cars sold in the U.S. will average 45 miles per gallon (mpg) by 2040 compared to 22 mpg in 2010, as more hybrids and other advanced vehicles hit the road.

               According to the U.S. Environmental Protection Agency the average fuel economy of the 2016 model year vehicles was 25.5 mpg, representing an improvement of 0.88 mpg per year.  Car makers will need to be unrelenting at this pace of innovation to meet Exxon’s predictions.

There are predictions in each of Exxon’s reports in 2012 to 2016.  However, since these forecasts are so fresh, we will need to wait a bit to see how good Exxon’s think tank really was.   In the most recent report published in December 2016, the energy mix acknowledges the shift to lower-carbon fuels and even admits a decline in oil production.  Of course, renewable energy sources are expected to grow, but natural gas is the real winner under Exxon’s view of the future.  

Exxon Mobile plans to be a major player in natural gas production.  The company produced 252,000 oil equivalent barrels of natural gas per day in 2016.  Earlier this year the company announced the development of a new natural gas dehydration technology aimed at creating efficiency in removing water vapor in natural gas at the production well.  The new system reduces surface footprint by as much as 70% and system weight by at last half. 

Exxon’s stock is priced at 17 times forward earnings for those who are content to own a fossil fuel producer.  That may seem like a bargain on the surface.  Then again the reality of reduced income potential in oil and gas assets may come home to roost very soon if the New York and SEC actions are successful.  Charges against asset values could lead XOM to even lower multiples.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.