The United States largest oil company, ExxonMobil, is facing a financial train-wreck in its domestic oil and gas sector. And, the majority of the blame can be attributed to Exxon’s move into shale. After Exxon acquired XTO Energy in 2009, a U.S. shale oil and gas producer, it has seriously begun to ramp up shale oil production in the Permian.

ExxonMobil plans on expanding Permian shale oil production to 600,000 barrels a day (bd) by 2025, up from the 115,000 bd as of October (thanks to the data from Shaleprofile.com). If you look at the chart below, Exxon’s Permian shale oil production shot up from less than 50,000 bd at the beginning of 2018, to over 115,000 bd in October:

Exxon is now the largest player in the Permian, according to the article, Exxon Becomes Top Permian Driller to Combat Falling Oil Output:

Exxon Mobil Corp. has overtaken rivals to become the most active driller in the Permian Basin, showing the urgency with which the world’s biggest oil company by market value is pursuing U.S. shale.

Exxon’s escalation in the Permian is essentially a bet that it can drill wells so cheaply that they’ll be profitable despite crude’s tumble since early October. The company says its shale wells can make double-digit returns with oil at just $35 a barrel.

Exxon moved into the Permian to stem a decade of falling domestic U.S. oil production. However, its statement that it will enjoy double-digit gains at a $35 oil price in the Permian may be more “delusional thinking” rather than company pragmatic optimism. I spent some time looking over Exxon’s financial statements, and I have to say I was quite shocked by their utterly dismal 2018 U.S. oil and gas financials.

While it’s true that Exxon enjoyed a substantial $20.8 billion net income in 2018, the majority of the company profits came from their non-U.S. or international operations. For example, Exxon’s total U.S. earnings were $6.3 billion last year compared to the $17.1 billion of international profits. Even though Exxon’s U.S. earnings accounted for a little more than 25% of total earnings last year, its U.S. oil and gas production sector only represented 7% of the company’s total profits.

NOTE: Exxon’s total $23.4 billion in U.S. and international earnings don’t include the $2.6 billion of corporate and financial costs, which result in a net $20.8 billion of profits.

To get an idea just how bad Exxon’s U.S. oil and gas financials have become, we must understand how it publishes its different financial data. Exxon, like most major oil companies, has three separate business components:

1) UPSTREAM: Oil and gas wells exploration, drilling & production

2) DOWNSTREAM: Refining and marketing of petroleum products

3) CHEMICAL: The production and marketing of petroleum-based chemical products

If we compare Exxon’s U.S. upstream financials versus its international upstream operations, we can easily spot the HUGE RED FLAG. The upstream data pertains to the exploration, drilling, and production of oil and gas wells. In 2018, Exxon’s U.S. upstream earnings were a paltry $1.7 billion compared to the $12.3 billion from its international upstream profits. But, that is only part of the bad news.

Exxon made $1.7 billion from its U.S. domestic oil and gas wells by spending a stunning $7.7 billion in capital expenditures (that figure also includes exploration expenses). The chart below reveals the truth about Exxon’s notion that it can make profits at $35 a barrel:

While Exxon invested $12.5 billion on international upstream capital expenditures (CAPEX) to produce 1.7 million barrels a day of total liquid oil production in 2018, it spent a staggering $7.7 billion in U.S. upstream CAPEX to supply only 551,000 bd of oil. Thus, Exxon spent nearly double the amount of CAPEX for each barrel of U.S. oil production versus its international oil supply.

Exxon Dollar of CAPEX per barrel of U.S. oil 2018 = $38.16

Exxon Dollar of CAPEX per barrel of International Oil 2018 = $19.96

Now, we must remember, CAPEX is not included in the Net Income financial statement. Capital expenditures are not apart of the actual oil and gas production costs. Regardless, Exxon spent nearly $6 billion more on U.S. upstream CAPEX than its earnings while the international upstream sector was basically even.

Yes, it’s true that Exxon makes additional profits from its Downstream and Chemical business divisions, but if we are comparing apples to apples, its U.S. oil and gas wells are consuming one hell of a lot more CAPEX than its international upstream operations. Again, the much higher U.S. oil and gas CAPEX spending is due to producing much more expensive unconventional shale oil and gas.

And, the situation looks even worse for Exxon if we compare the company’s recent financials to those in 2006 when the oil price was about the same as it was last year. According to Exxon’s 2006 Annual Report, it’s U.S. upstream earnings (oil and gas wells) where more than double its CAPEX spending:

In 2006, when the oil price was $66, a $1 more than in 2018, Exxon made $5.2 billion on upstream earnings by investing $2.4 billion of CAPEX.  Furthermore, its international upstream earnings were $21.1 billion versus the $13.7 billion in capital expenditures. Thus, Exxon’s U.S. upstream CAPEX spending jumped by more than $5 billion from 2006 to 2018 while its international upstream CAPEX spending fell more than a billion.

If we just focus on Exxon’s U.S. total earnings versus its CAPEX spending from these two periods, the difference is remarkable:

Exxon’s U.S. total earnings in 2006 were $7.2 billion more than its CAPEX spending compared to $4.3 billion less in 2018:

You can look over the charts above and study the differences from each of Exxon’s business sectors, but the fact remains, its U.S. oil and gas wells are the leading UNDER-PERFORMER in the group. Why? Well, Exxon invested 72% of its CAPEX in its upstream oil and gas wells in 2018 only to receive 27% of the earnings. At least in 2006, Exxon’s oil and gas upstream earnings were 50% of total profits. It looks as if Exxon is heading in the wrong direction, as it pertains to profitability, just to increase its U.S. oil and gas production.

It remains to be seen if Exxon will be able to make double-digit profits in the Permian at $35 a barrel. If the figures above provide us with any indication, I highly doubt they will benefit much from their stake in the U.S. Shale Oil Ponzi.

To get an idea just how much Exxon is investing in the Permian Shale, let’s look at the following chart:

As we can see, Exxon’s U.S. upstream CAPEX spending has more than doubled since 2017 to increase daily U.S. annual oil production by 36,000 bd. I would say the majority of the increase was from ramping up unconventional shale drilling and production in the Permian. The next chart shows the quarterly changes in U.S. total oil production versus domestic upstream CAPEX spending:

Here we can see that Exxon’s U.S. upstream CAPEX spending has more than doubled since the beginning of the year from $1.2 billion (Q1 2018) to $2.6 billion (Q4 2018) to increase production by 60,000 bd. That is one hell of a lot of money to spend to increase oil production. And it’s even worse when we go back another year. For example, Exxon was only investing about an average of $750 million a quarter Q4 2016 to Q2 2017 on its U.S. oil and gas wells. Now, it’s spending more than three times the CAPEX per quarter to ramp up its Permian Shale Oil production.

I believe ExxonMobil will experience the same fate as most U.S. shale oil and gas producers, and that is, it will lose money to increase its domestic oil production.  Of course, Exxon might be able to be more competitive than the other smaller shale oil and gas producers, but when the U.S. and global economy starts to unravel, oil prices will also head south.

It will be interesting to see Exxon’s U.S. financial results over the next couple of years, especially if we have lower oil prices. While Exxon may likely increase its U.S. oil production, via the Permian, it will come at a considerable cost. And that is, it will use the profits from its international operations to make up for the losses in the Permian. How long can Exxon continue on that cannibalizing business model?  Good question.

Interestingly, we saw the same sort of insanity take place with BHP Billiton. While BHP is the largest mining company in the world, it thought it could make gold from lead, and decided to start investing in the U.S. Shale Patch in 2011. Over the next several years, BHP spent $50 billion on its U.S. shale oil and gas operations. However by 2017, BHP realized that it was sitting on a colossal stinking pile of Shale Asset Shyte, so it decided to make a clean exit.

Last year, BHP sold its total U.S. Shale Assets for a net loss of $20+ billion, which suggests that even the smartest CEO’s at the top still make costly mistakes. Moreover, it took quite a while for BHP to realize that shale was a BIG MISTAKE. So, I give Exxon a few years before it comes clean on why it should have stayed away from shale.

But then again, maybe Exxon sees the writing on the wall that there is nothing left after shale so it will try to BAMBOOZLE the public and investors by speaking in HALF-TRUTHS about shale oil and gas via the creative work by the wonderful folks in its investor relations department.

Lastly, ExxonMobil’s U.S. oil and gas sector is heading toward a financial disaster. It’s U.S. oil and gas CAPEX spending will choke the living hell out of its profits. While some may think I am fermenting hype, the financial results shown above point to a pretty clear trend… and it ain’t good. If one of the world’s largest oil companies can’t make money producing U.S. shale, then what does that say for the rest of the industry??

More on this in future articles.