Exxon Mobil Goes Where Few Oil Giants Tread

NEW YORK (TheStreet) -- The U.S. oil behemoth Exxon Mobil (XOM) revealed Wednesday that it has decided to invest more than $1 billion in its refinery in Antwerp, Belgium, even as others flee the continent's ailing refining sector.

That is because America's biggest oil company is eyeing a European revival several years down the road.

Exxon Mobil, whose shares closed Wednesday at $101.57, flat for the year to date,  has said that it will install a new coker unit to its 320,000 barrels a day refinery that will convert residual oils into transportation fuels.

>>Dicker/Cramer: End of the Export Ban Means the End of the Game for Refiners

In less than 10 years, Exxon Mobil has invested more than $2 billion at Antwerp and is still willing to significantly ramp up its facility despite a challenging business environment in Europe's refining sector, which is struggling due to overcapacity and weak demand.

By making investments in Europe's ailing refining industry, Exxon Mobil is following in the footsteps of Russian oil and gas companies.

The shale gas boom in the U.S. and growing competition from the Middle East and Asia are making things difficult for Europe's refiners.

Over the last five years, 15 refineries have closed in Europe. France, home of the continent's leading refiner Total (TOT), bore the brunt of the closures. Since 2008, the country's refining capacity has dropped by 30%.

Europe's current refining capacity stands at around 15 million barrels of oil per day. By mid-2014, the refining margins in the continent were $20.50 per metric ton, down from $24.60 per metric ton last year and $49.19 per metric ton the year before. For this to change, analysts have said that Europe will have to slash around 10% of its refining capacity. Eventually, amid deteriorating margins, nearly dozen refineries could shut down in the next couple of years.

According to the European Commission, the shale gas boom in the U.S is the primary factor responsible for the depressed refining margins in Europe.

Meanwhile, new refineries currently under construction in the Middle East, Russia and India are targeting greater share of the market. According to the International Energy Agency's estimates, non-OECD nations will install 1.7 million barrels per day of additional capacity in the current year, which is higher than the agency's previous estimate of 1.5 million barrels per day.

The shale gas boom in the U.S. and the new refining capacity in non-OECD countries will continue to exert downward pressure on Europe's refining margins.

Increasing supplies of fuels that do not require refining, such as biofuels, will further exacerbate the tough business environment.

State-owned oil companies as well as oil traders such as Gunvor and Vitol, have been purchasing the ailing refineries, but their decisions are motivated by different strategic reasons. Generally speaking, vertically integrated oil companies and refiners have been reducing their exposure to Europe.

For instance, Total has planned to reduce its reliance on Europe's refining industry by 20% between 2011 and 2017. Likewise, three days ago, the Arkansas-based Murphy Oil (MUR) decided to sell its Milford Haven refinery in the U.K.

So why is Exxon Mobil doing the exact opposite? In a statement, Exxon Mobil said it is investing for the "long term." The Antwerp refinery has been operating for more than 60 years and Stephen Hart, Exxon Mobil's European director of refining operations, has said that it could continue working for the next three or five decades.

Clearly, the company isn't deterred by the ongoing weakness in the industry and is hoping that, ultimately, the refining margins will improve.

Furthermore, Exxon Mobil is investing in the transportation fuels, such as diesel and marine gasoil. Although Europe's refining industry faces dim prospects, the demand for transportation fuels, as per Exxon Mobil's energy outlook, is projected to continue growing through 2040.

Besides Exxon Mobil, the Russian energy giants Rosneft (RNFTF) and Lukoil (LUKOY) have also been investing in Europe's refining industry. Last year, Rosneft acquired a 21% stake in Italy's refiner Saras. The Russian oil giant is now moving to acquire most of Morgan Stanley's (MS) physical oil trading business, which can also have a positive impact on the performance of the Italian company.

Similarly, Lukoil is spending hundreds of millions to upgrade its refinery in Bulgaria. This will be the second major investment by Lukoil in Europe's refining sector after the company, through a series of transactions, took full control of the ISAB refining complex in Sicily earlier this year.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates EXXON MOBIL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate EXXON MOBIL CORP (XOM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, good cash flow from operations, increase in stock price during the past year and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has increased to $15,103.00 million or 11.11% when compared to the same quarter last year. Despite an increase in cash flow, EXXON MOBIL CORP's average is still marginally south of the industry average growth rate of 17.57%.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • XOM's debt-to-equity ratio is very low at 0.12 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Despite the fact that XOM's debt-to-equity ratio is low, the quick ratio, which is currently 0.55, displays a potential problem in covering short-term cash needs.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 3.2%. Since the same quarter one year prior, revenues slightly dropped by 2.1%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

If you liked this article you might like

How to Play the Breakout in Oil

How to Play the Breakout in Oil

Chevron Gains After JPMorgan Says Recent Pullback Means Time to Buy

Chevron Gains After JPMorgan Says Recent Pullback Means Time to Buy

Week in Review: Stocks Tried Really Hard to Rally This Week

Week in Review: Stocks Tried Really Hard to Rally This Week

I'm Watching Treasury Yields, Inflation and Oil Names This Week -- Market Recon

I'm Watching Treasury Yields, Inflation and Oil Names This Week -- Market Recon

Oil Prices Higher After Falling Earlier This Week Amid Rising U.S. Production

Oil Prices Higher After Falling Earlier This Week Amid Rising U.S. Production