Two takes on Exxon this earnings season

Two takes on Exxon this earnings season

Two takes on Exxon this earnings season The financial press is reporting headline news that Exxon Mobil, the world's largest publicly traded energy company, increased profit 28% when it reported earnings this week. The high price of oil and asset sales drove the positive earnings, which came in at $2.05 per share, above expectations of $1.86 per share. Second quarter revenue totaled $111.64 billion, beating forecasts for revenue of $108.38 billion.

But the good news has been ignored by the market. The stock price of Exxon actually dropped in the wake of the good news, falling 1.5% in the wake of the reported earnings.

Why is the stock dropping on unexpectedly good earnings?

One story being discussed in the shadier, dis-reputable areas of the internet concerns another key story coming out of the company--total daily production is at a five-year low for Exxon. The overall global harvesting of crude oil by humans is arcing through the point of maximum production of oil as predicted by the so-called "peak oil activists." This fact is registering in financial markets.

There is a rational argument here.  Data compiled by Bloomberg that shows total daily production at Exxon has dropped 5.7 percent to 3.84 million barrels of crude a day, the lowest since the third quarter of 2009. Exxon had been expected to post daily output equivalent to 3.96 million barrels. That didn't happen. Total production is falling, and this fact has got the so-called peak oil types nattering and chattering. This fact has been seized on by traders, is the reason Exxon stock dropped on unexpectedly high earnings, is a sign that world is at peak production of oil as the modern disciples of a long-dead Shell Oil geophysicist, Marion King Hubbert, have long predicted.

Referencing flow-based methods of oil analysis pioneered by the late Hubbert, many geologists have long predicted that the big western oil companies would arrive at a point of maximum daily production through the early years of the 21st century. After a century and a half of ever-expanding global oil production, the big onshore conventional oil fields have largely been found and tapped. The search for more oil is moving on to the margins of the single oil endowment. New production now comes from tar sands, fracked shale, ultra-deepwater sources on the outer edges of the continental shelf, as well as the Arctic. But while there is much new flow coming from these harder-to-produce regions, the production from these marginal sources cannot keep pace with ongoing declines in flow from old and aging conventional fields, many of which are declining at greater at faster rates than ever. The human age of oil, on a macro level, is evolving through a radically unique inflection point.

Hubbert predicted in the middle of last century that, after a century and a half in which total production would expand, daily flow would eventually peak right about now, would then go into decline for another century and a half as the age of oil evolves through what is, basically, the statistical center of this unique era.  This macro trend, the big, overall "shape" of the oil age, is now showing up in the production stats

A stat floating around the peak meme-o-sphere suggests that the trend toward lower production is afflicting all the big major oil companies. Although the major oil companies are spending more money than ever on production and development, peakists point out, the seven largest publically owned oil companies have all peaked in terms of production and are now slipping over the point of maximum production into the coming twilight of the oil era. Combined production at the biggest oil companies is down 12.4% since 2009. Production at BP fell thirty percent between 2009 and 2013. Production at Total is down 15.5%, ConocoPhillips is down 10.4%
Many will point out that there are still massive amounts of oil left to be found and produced, and this is the case. There is more than half of the world's oil left to produce. But the story of the oil age when viewed from the flow-based perspective is that, a century and a half after the start of widespread oil reduction in 1858, total daily production is no longer rising as it did in the post-war era between 1950 and 2000 (when daily production increased as much as 10% a year as it did in the 1970s). Today, daily production of all liquid hydrocarbons is higher than ever. But growth rates have slowed, production levels have stalled. Total daily production is no longer growing as fast as it has in the past. This fact is clear in the most basic data on flow as generated by the United States Geologic Service. Some think is the "plateau" in production of crude oil that Hubbert predicted--he assumed this peak in production would occur at the halfway point of the three hundred year-long oil age, or about now.

Today, Exxon is allocating $39.8 billion to capital projects this year. Hundreds of millions have been spent on an exploratory well in Russia's Kara Sea, part of a 29-year agreement with Russian producer, OAO Rosneft (ROSN). The hope is that production in Russia's Arctic regions in an effort to reverse the declining production. But the wells are few and far between there, are amazingly expensive. Meanwhile, the big bulk of the large old conventional oil fields found back in the golden age of crude oil discovery (a point passed in the mid-1960s if the stats are to be believed) are aging, declining. The alternative sources of unconventional crude are not making up the difference. Many of the shale-based companies are actually spending more money than they are making off shale oil, so difficult and expensive are these sources to drill. Chinese demand for oil is still growing rapidly. This, at the same time the supply of daily crude oil is no longer rising means the new and permanent dynamic of energy markets is that prices are now more likely to rise and spike than to fall as demand pushes up against stalled production/supply. The constant upward pressure on oil prices continues to short-circuit the consumer economy. The global age of crude oil harvesting arcs through what is, basically, the statistical century of the oil age. Or so goes the story. Considering Exxon stock dropped after beating earnings, it's a story that some will say is playing out in real-time today. 

Here is a fascinating chart making the rounds in peak discussion circles: