After reporting lower than expected earnings, ExxonMobil’s stock price sold off on Friday. The company blamed poor performance on reduced production volumes and a weaker oil price. However, the real culprit will turn out to be Exxon’s big move into the Great U.S. Shale Oil Ponzi Scheme.
As I mentioned in my recent article, EXXONMOBIL U.S. OIL & GAS FINANCIAL TRAIN-WRECK: Producing Shale Is Destroying Its Bottom Line, the company will continue to spend a great deal of capital with little financial reward. So, it wasn’t a surprise to see Exxon’s Q1 2019 earnings decline by $3.6 billion compared to the previous quarter… even though U.S. oil production had increased.
While weaker earnings were experienced across all of the company’s sectors, upstream (oil & gas wells), downstream (refining and marketing products) and chemical, the big RED FLAG was in the U.S. oil and gas sector. According to Exxon’s Q1 2019 Earnings Release, the company invested $2.5 billion in CAPEX (capital expenditures) on its U.S. oil and gas wells, to earn a paltry $96 million in earnings:
Now, compare the miserable U.S. upstream earnings to Exxon’s International upstream earnings of $2.78 billion on $2.8 billion of capital expenditures. ExxonMobil will likely invest close to $10 billion in CAPEX on just its U.S. upstream sector (spent over $5 billion of CAPEX past two quarters) this year, and if oil prices fall, it will impact their earnings quite negatively.
This next chart shows how much money Exxon is investing in its U.S. oil and gas sector each quarter:
We can see that Exxon ramped up capital expenditures in its U.S. oil and gas properties (mostly shale) significantly since the beginning of 2018. Over the past year, the company has spent $8.8 billion to increase production by 77,000 barrels per day. That is one hell of a lot of money to increase U.S. oil production by 15%, and Exxon will have to invest a massive amount more if it wants to reach its goal of 600,000 barrels per day in the Permian by 2024.
Unfortunately, the RED QUEEN (rapid shale oil decline) never sleeps. According to the most recent data by Shaleprofile.com, if no new wells were added in 2018, overall production would have declined by 44% in just one year. That’s nearly one million barrels per day of oil production, vaporized:
The chart shows each year of FIRST FLOW by the different colors. By the end of 2017, production reached 2.12 million barrels per day (mbd) and fell to 1.19 mbd by the end of 2018. You will notice that as each year goes by, the decline rate becomes more severe, or drops at a much steeper angle. Thus, the companies producing shale oil in the Permian will have to drill more wells and spend even more money to increase production. I believe once we see the full year of 2019 Permian oil production, the annual decline will be higher than 44% for 2017.
The rapid decline rate that plagues the U.S. shale oil industry has HOODWINKED the market and investors. I still receive emails from individuals suggesting that the breakeven for U.S. shale is now $30-$40 a barrel. Good grief. If that was true, then why did the largest major oil company in the United States report a lousy $96 million of earnings in its U.S. oil and gas sector? That’s correct… $96 million of profit after producing and selling 55 million barrels of oil at a realized price of $53.30 per barrel in Q1 2019.
And, as I mentioned in the previous article linked above, Exxon is now spending nearly three times the amount of CAPEX for each barrel produced than it did in 2006 when the oil price was about the same:
In 2006, ExxonMobil spent $16.46 worth of CAPEX on each barrel it produced in its U.S. oil and gas sector versus the $46.58 in Q1 2019. Of course, the company spent more money on CAPEX per barrel when oil was over $100 a barrel from 2011-2014, but we must compare apples to apples. Exxon could afford to invest more CAPEX when oil prices were double what they are today. Even if we compare Exxon’s International Upstream CAPEX per barrel, it has only increased by approximately $4 since 2006.
So, if we look at the numbers, SHALE OIL continues to destroy Exxon’s U.S. upstream sector. No doubt, higher oil prices might provide a bit of a breather for Exxon, but with the U.S. and global economic indicators turning down, falling petroleum demand will likely lead to weaker, not stronger oil prices. But, if the central banks come in with additional coordinated QE liquidity injections, much like the massive increase of liquidity from December to February that pushed markets back close to their highs, oil prices could continue higher.
Regardless, the U.S. Shale Oil Ponzi will die with or without high oil prices… it’s just a matter of time. I believe we are going to start seeing some serious fireworks in the U.S. shale patch within the next 1-2 years.