Exxon Pouring Money Into Risky Wells

Jim Brown
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You would not think of Exxon as a wildcat oil explorer. However, as their recent capital spending summary shows, Exxon has been spending billions in places that you would not expect to find a staid old oil company.

Exxon said on Monday they spent $27.1 billion last year exploring for oil. That was a rise of +3.6% over 2008. Spending in the fourth quarter alone was $8.3 billion. That was the highest three-month total ever. Unfortunately Exxon's spending on dry holes rose +39% in 2009.

Even with the record spending Exxon still posted a $6.05 billion profit for Q4 but that was down -23% from 2008. Chevron was not the only oil company losing money on their refining business. Exxon's massive downstream business lost $189 million for the quarter. This had to be a very bad quarter for all the refiners to be losing money and closing plants nearly every week.

Total announced on Tuesday they were closing their Flanders refinery permanently due to the changing consumer demand. They will keep the plant open as a training center but not as an operating refinery. Valero also said it was closing additional refineries and trying to sell several. Valero became the largest refiner in North America over the last five years and now that refining is losing money Valero is in trouble.

Fortunately for Exxon they are not just a refiner and have a strong upstream business that supports the company. The upstream business produced profits of $5.78 billion in Q4. How they did it and still came up with so many dry holes is a mystery. It shows that those big bets pay off big when they actually find something.

Exxon is currently exploring in eight of the highest risk locations around the world and would like to be in two more areas. Exxon is trying to negotiate a deal with Transocean on a long term commitment for a drilling rig capable of drilling in the harsh Artic weather.

Other areas Exxon is exploring includes off the coast of Libya despite a dry hole on the first attempt. Exxon is partnering with Petrobras on a five-year project to explore in the Black Sea. The companies had to dismantle a big ocean rig to move it through the Bosporus Strait in Turkey.

A large offshore well can cost more than $100 million and coming up dry is a painful experience. Marathon said this week it was cutting capital spending by 17% to $5.1 billion because of the tough requirements to be an explorer today. BP cut spending in 2009 by 36% and Chevron by 7.9%.

Two companies are planning on exploring in the harsh waters off the Fauklands in hopes of finding a way to tap the expected 60 billion barrels deep under water there. The Fauklands have extreme weather conditions that are so bad the military vessels had trouble operating there during the Fauklands war. Those vessels don't have to remain perfectly stationary in one place for a month at a time so I suspect there will be some expensive wells down there.

This extremely expensive exploration is probably the reason Exxon is partnering with Shell to produce the West Qurna field in Iraq even though they only earn $1.50 per barrel produced. The expected output once the field is up and running is 3 mbpd so even at a $1.50 per barrel that is still some decent money. $4.5 million a day for drilling into a known field that is not in 8,000 feet of water has got to be a lot easier for a company like Exxon even if pipelines are getting blown up every week.

I am not convinced enough to buy Exxon stock with nearly five billion shares outstanding. It will take a lot to move the needle on Exxon shares and a $30 billion a year exploration budget requires a lot of successes to produce a continued profit. The dry hole expenses rising to 39% of the budget is a tough pill to swallow. Let's hope Exxon has better luck in 2010.

Jim Brown