July 30, 2018 Read More →

‘What made Exxon special is fading’

Wall Street Journal:

For decades it was the very model of a modern supermajor, but Exxon Mobil ’s edge over the rest of Big Oil is slipping and probably will continue to do so.

In the past year, for example, Exxon’s shares have trailed those of each of its global peers—Shell, BP, Chevron and Total —to the tune of 27 percentage points on average. Even after that, it is valued at a 43% premium to those peers on enterprise value to projected earnings before interest, taxes, depreciation and amortization, and a 22% premium on forward earnings, according to FactSet data.

In the 12 years following its merger with Mobil ending in 2012, Exxon paid out $318 billion in cash to its owners. Exxon’s market value today is just $345 billion. During those years it had an average return on invested capital of over 35%—9 percentage points higher than its Big Oil peers, on average.

But the shale revolution has changed that by leveling the playing field and shortening the investment cycle. Exxon’s ROIC since 2012 has, not surprisingly, been a much lower 11.6%.

There are still big rolls of the dice to be made, of course. Exxon has made a huge discovery in Guyana and is betting on conventional projects in Brazil, Papua New Guinea and elsewhere. It also is making promising energy infrastructure investments along the U.S. Gulf Coast.

If history is any guide, it will manage these projects well. But, as the oil-and-gas business becomes more like manufacturing and less like wildcatting, what made Exxon special is fading. That premium it earned over the decades will keep fading, too.

More: Slouching Tiger ($): Why Exxon Isn’t Worth Its Premium

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