07 apr 2015 letter to nebraska washington dc delegation

8/9/2019 07 Apr 2015 Letter to Nebraska Washington DC Delegation

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Douglas A. GrandtPO Box 6603

Lincoln, NE 68506 (510) 432-1452

April 7, 2015

Senator Deb Fischer383 Russell Senate O ! ce Building

Washington, D.C. 20510

Re: Oil Refining - Considering future eventualities versus the myopia of the present (letter #7)

Dear Senator Fischer,

U.S. ENERGY INDEPENDENT does not come from the likes of ExxonMobil holding us hostageto rectify their having “shot themselves in the foot.” The glut from the shale oil and gas boom was their own miscalculation. Now, they are holding a gun to our collective head, demandingthat their cash flow and earnings be protected by allowing the glut of excess production to

flood the international markets to fetch higher prices. That, in turn will raise domestic prices.Where is the industry taking us? Are We the People beholden to the industry for the fossil fuelsthey provide — are we expected to acquiesce to their experiment with our economy? Who willbale them out when their accumulated miscalculations and hubris result in financial collapse?

We need to manage the industry’s decisions for the sake of public interest and national interest.Please call them to task, develop a strategy to get control, assure true energy independence.

This is no April Fools joke. One analyst had the courage to publish the following assessment,which — when taken in context with countless other assessments that also hint at a precariousfuture for the fossil fuel industry — points to serious risk for our economy. Read this critically:

Exxon Mobil - The Company That Buys High And Sells Low April 2, 2015 | Aristofanis Papadatos | http://bit.ly/ALPHA2April15

Summary

• XOM is reportedly escalating its plans to expand the capacity of its Beaumont refineryfrom 344 Kbbl/day to 850 Kbbl/day in a multi-billion dollar project.

• While the U.S. refining margins are high at the moment, the outcome of this investment isunpredictable and will largely depend on whether the ban on oil exports is repealed.

• The article discusses a series of critical decisions that XOM has made in recent years,which have been marked by buying high and selling low.

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Exxon Mobil (NYSE:XOM) is reportedly escalating its plans to expand the capacity of itsBeaumont refinery from 344 Kbbl/day to 850 Kbbl/day in a multi-billion dollar project. Themanagement previously intended to double the capacity of its refinery, but it now seemsdetermined to expand its capacity even further. While the U.S. refining margins areparticularly high at the moment, the outcome of this investment is unpredictable and willlargely depend on whether the U.S. government will continue to ban oil exports in the future.

In addition, although it is really hard to evaluate this decision of the management at themoment, it is safe to claim that it has a similar character to some past decisions; investing in

[email protected]



Senator Deb Fischer April 7, 2015

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a sector while it is thriving. Unfortunately, due to the multi-year lag between the investmentdecision and the beginning of cash inflows, the results of past decisions have often turnedout to be very poor. The article discusses a series of critical decisions that the company has

made in recent years, which have been marked by buying high and selling low, and havethus, pronouncedly hurt its shareholders.

Natural gas

Exxon Mobil acquired a major producer of natural gas, XTO Energy, in a $41 B ($31 B plus$10 B debt) deal in 2009. As the success of any deal depends on its price, the deal hasproved very unfortunate for Exxon Mobil, as it was concluded in a context of elevated pricesof natural gas (around $6). To be sure, natural gas has traded much lower in recent years -roughly 50%, on average, below the then-prevailing price.

It is evident that the return on investment of this deal has been very poor, and it will takeseveral years to Exxon Mobil to earn back the amount it spent on that acquisition. Theverdict is so obvious that even the CEO of the company admitted two years ago that the

timing of the deal was too unfortunate for the company. Therefore, the company essentiallywasted almost all its earnings from its best year ever (in terms of earnings), 2008.

Oil

During the last 4 years, in which oil was hovering around $100, Exxon Mobil excessivelyincreased its capital expenses for upstream projects. To be sure, as the table shows, thecompany allocated almost all its earnings to capital expenses in the last few years.

The unfortunate factor is the significant, multi-year lag between the time of investment andthe time of incoming production from these projects. Therefore, the management of each oilcompany should have a correct long-term view and great timing in its critical decisions.Unfortunately for shareholders, the projects with the above expenses were planned withforecasts for oil to remain above $100 for the foreseeable future, and hence, these projectsare condemned to provide poor returns if oil remains suppressed for a prolonged period.

Of course, no one can blame management for its efforts to replenish its oil reserves.However, the cost of most projects largely depends on the prevailing environment duringthe initial phase, and hence, management is supposed either to have timing skills or at leastto even out the great variations of expenses in the long term. Unfortunately, themanagement of Exxon Mobil has recently proved insufficient even for the latter.

Of course, some investors may claim that management has the excuse that very few peoplepredicted the collapse of oil price due to the booming production of shale oil. Nevertheless,the managements of oil majors, particularly that of this premium company, are expected toexecute far above the average and differentiate from the crowd at critical times.



Senator Deb Fischer April 7, 2015

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Share repurchases

The company has consistently repurchased its shares to enhance shareholder returns.Unfortunately for shareholders, the company funded the acquisition of XTO Energy with theissuance of new shares in 2010, when the stock stood at a decade low. Moreover, now thatthe oil producers are facing the headwind of cheap oil, the company has drastically reducedthe annual rate of share repurchases, from 5% in 2011-2013 to 3% in 2014 and only 1% in2015.

Nevertheless, to be fair to management, the poor timing in share repurchases is the normfor the vast majority of companies. More specifically, as share repurchases are the lastpriority - after the capital expenses and dividends are paid - most companies tend torepurchase their shares only when they have ample cash. This invariably occurs duringbooming periods, in which the stock prices are inflated, and hence these share repurchaseshardly add any shareholder value. While most companies tend to make the same mistake,the few companies that keep performing buybacks even during rough times make adifference to their shareholders.

Downstream

While refiners in most parts of the world have suffered from depressed margins in the last 6years, their U.S. counterparts have thrived, thanks to the deep discount of WTI vs. Brent,which has resulted from the shale oil boom. It is remarkable that this advantage of U.S.refineries had remained largely unnoticed in the oil majors till recently, as oil majorsnormally derived about 90% of their earnings from the upstream sector. However, now thatthe oil price has collapsed, the downstream sector has provided significant support on theearnings of oil majors. Therefore, it makes sense that Exxon Mobil wants to spend billionsto expand the capacity of its Beaumont refinery.

Nevertheless, as it will take some years to complete the expansion, the profitability of thisproject will depend on the long-term trajectory of U.S. refining margins. If the ban on U.S. oilexports is repealed, the refining margins will pronouncedly contract, and hence, this projectwill offer disappointing returns. Therefore, management should carefully evaluate the long-term path of U.S. refining margins, and not just decide based on the recent enthusiasm overU.S. refining margins. Hopefully, they will do their homework this time.

Conclusion

Buying high and selling low is a catastrophic strategy for long-term returns. Unfortunately,this is much easier said than done, as it is much easier to follow the herd than go againstthe flow. To be sure, the herd followers will be easily forgiven if their decision is provenwrong, whereas the ones who decide against public opinion will incur excessive criticism,should they fail. The management of Exxon Mobil has made some poor critical investmentsin the past, which have punished the company's shareholders. Hopefully, their decision to

spend billions on the refinery expansion is based on a solid long-term view.Can you ask your colleagues on the Energy and Natural Resources Committee to convene ahearing and ask Rex Tillerson and other CEOs if they will supply fuels when they fail to make aprofit and how they will clean up the toxic infrastructure? Will Risk Management avert theworst, the unfathomable economic collapse they may cause by their decisions and hubris?

Sincerely yours,

Doug Grandt




Lincoln, NE 68506 (510) 432-1452

April 7, 2015

Senator Ben SasseB40E Dirksen Senate O ! ce Building



Dear Senator Sasse,






Summary




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[email protected]



Senator Ben Sasse April 7, 2015

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Natural gas




Oil








Lincoln, NE 68506 (510) 432-1452

April 7, 2015

Representative Jeff Fortenberry1514 Longworth House O ! ce Building



Dear Representative Fortenberry,






Summary




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[email protected]



Representative Jeff Fortenberry April 7, 2015

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Natural gas




Oil







Representative Jeff Fortenberry April 7, 2015

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Share repurchases



Downstream



Conclusion


spend billions on the refinery expansion is based on a solid long-term view.Can you suggest that your colleagues on the Energy and Commerce Committee convene ahearing and ask Rex Tillerson and other CEOs if they will supply fuels when they fail to make aprofit and how they will clean up the toxic infrastructure? Will Risk Management avert theworst, the unfathomable economic collapse they may cause by their decisions and hubris?

Sincerely yours,

Doug Grandt



Representative Adrian Smith April 7, 2015

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Natural gas




Oil








Lincoln, NE 68506 (510) 432-1452

April 7, 2015

Representative Brad Ashford107 Cannon House O ! ce Building



Dear Representative Ashford,






Summary




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[email protected]



Representative Brad Ashford April 7, 2015

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Share repurchases



Downstream



Conclusion


spend billions on the refinery expansion is based on a solid long-term view.Can you suggest that your colleagues on the Energy and Commerce Committee convene ahearing and ask Rex Tillerson and other CEOs if they will supply fuels when they fail to make aprofit and how they will clean up the toxic infrastructure? Will Risk Management avert theworst, the unfathomable economic collapse they may cause by their decisions and hubris?

Sincerely yours,

Doug Grandt

07 apr 2015 letter to nebraska washington dc delegation

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