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Douglas Grandt answerthecall@icloud.com

If ExxonMobil is the "gold standard", what is the industry prognosis?
August 1, 2016 at 8:28 AM
Edward Hild (Sen. Murkowski) Edward_Hild@murkowski.senate.gov, David Cleary (Sen. Alexander)
David_Cleary@alexander.senate.gov, Dan Kunsman (Sen. Barrasso) Dan_Kunsman@barrasso.senate.gov,
Joel Brubaker (Sen. Capito) Joel_Brubaker@capito.senate.gov, James Quinn (Sen. Cassidy) James_Quinn@cassidy.senate.gov,
Jason Thielman (Sen. Daines) Jason_Thielman@daines.senate.gov, Chandler Morse (Sen. Flake)
Chandler_Morse@flake.senate.gov, Chris Hansen (Sen. Gardner) Chris_Hansen@gardner.senate.gov,
Ryan Bernstein (Sen. Hoeven) Ryan_Bernstein@hoeven.senate.gov, Boyd Matheson (Sen. Lee) Boyd_Matheson@lee.senate.gov
, Mark Isakowitz (Sen. Portman) Mark_Isakowitz@portman.senate.gov, John Sandy (Sen. Risch) John_Sandy@risch.senate.gov,
Travis Lumpkin (Sen. Cantwell) Travis_Lumpkin@cantwell.senate.gov, Jeff Lomonaco (Sen. Franken)
Jeff_Lomonaco@franken.senate.gov, Joe Britton (Sen. Heinrich) Joe_Britton@heinrich.senate.gov, Betsy Lin (Sen. Hirono)
Betsy_Lin@hirono.senate.gov, Patrick Hayes (Sen. Manchin) Patrick_Hayes@manchin.senate.gov,
Bill Sweeney (Sen. Stabenow) Bill_Sweeney@stabenow.senate.gov, Jeff Michels (Sen. Wyden) Jeff_Michels@wyden.senate.gov,
Michaeleen Crowell (Sen. Sanders) Michaeleen_Crowell@sanders.senate.gov, Kay Rand (Sen. King) Kay_Rand@king.senate.gov
, Joe Hack (Sen. Fischer) Joe_Hack@fischer.senate.gov, Derrick Morgan (Sen. Sasse) Derrick_Morgan@sasse.senate.gov,
Karen Billups (Senate ENR Ctee) Karen_Billups@energy.senate.gov, Angela Becker-Dippmann (Senate ENR Ctee)
Angela_Becker-Dippmann@energy.senate.gov, Ginger Willson (Sen. Sasse) Ginger_Willson@sasse.senate.gov,
Ali Aafedt (Sen. Hoeven) Alexis_Aafedt@hoeven.senate.gov, Colin Hayes (Senate ENR Ctee) Colin_Hayes@energy.senate.gov,
Michael Pawlowski (Sen. Murkowski) michael_pawlowski@murkowski.senate.gov

Dear Chiefs of Staff:

Friday, I emailed you an article titled ExxonMobil Earns $1.7 Billion in Second Quarter of 2016.
This morning the following assessment by Richard Zeitsa reputable Oil & gas, commodities, long/short equity, research analyst
appeared through my Seeking Alpha subscription. This validates my concerns expressed Friday, and heightens the urgency for
Congress to investigate and become expert in the prospects of a collapse of the oil & gas production and refining industry.
What I wrote to you Friday is worth repeating verbatim:
With the current glut of supplies of oil and gas and industrys apparent conclusion that increased drilling and production is
the solution, there is no relief in sight for the depressed state of global commodity prices for oil and gas.
The industry is in a pickle and ExxonMobils second quarter results underscore the problem.
Where are we headed? What lies ahead for the industrys viability, debt defaults, bankruptcies?
What lies ahead for the oil market, the stock market, pensions, life savings, superannuations, the U.S. economy?
You are the gatekeeper and task master for your Senators staff. You make assignments and review performance.
Is anybody on your staff presently assigned to evaluate the repercussions of the current oil and gas price crisis?
Please compel your Senator to initiate hearingsor to demand ENR Chairman Lisa Murkowski to callfor CEOs of the
major oil and gas production and refining companies to testify how they will exercise Fiduciary Duty in the face of
bankruptcy without jeopardizing the Public Interest, National Interest indeed U.S. National Security.
I believe we are on the brink of a "train wreck" between Corporate financial survival and National economic survival.
You are uniquely situatedfortunately or regretfullyin a position which demands your serious attention and action. It is up to
you to nudge your Senator to take preparatory action.
Experts have predicted this and it is happening now. I implore you to initiate Senate hearings on this.
Sincerely yours,
Doug Grandt
PO Box 432, Putney, VT 05346

Can Exxon Mobil Prosper In A Sub-$50 Per Barrel World?

Richard Zeits | Aug. 1, 2016 8:09 AM ET | Seeking Alpha
Summary
Exxon Mobil has brought its capital spending in approximate balance with operating cash flow, a significant
accomplishment, given the severity of the oil price decline.
This adjustment is costly the Upstream business is starved of capital and long-term consequences for

This adjustment is costly the Upstream business is starved of capital and long-term consequences for
production volumes will be significant.
At sub-$50 per barrel (and, arguably, even higher) oil price, the companys dividend will remain, in significant
part, a borrowed dividend or distribution from asset sales dividend.

Important note: This article is not an investment recommendation and should not to be relied upon when making
investment decisions - investors should conduct their own comprehensive research. Please read the disclaimer at
the end of this article.
Exxon Mobil's resilient stock price performance since the onset of the downcycle in oil may create an impression
that the company has a silver bullet. In reality, however, Exxon Mobil is not dissimilar to other companies in the
Oil and Gas sector and has no immunity to an extended trough in oil, even though the company's exceptionally
strong balance sheet and high weight of Refining and Chemicals in the portfolio have helped to mitigate the
impact.
Exxon Mobil's Upstream business is severely challenged in a sub-$50 per barrel oil price environment. The goal
of living within cash flow is just one of the reasons behind the company sharply curtailing its capital spending, in
my opinion. The other, arguably more important, factor is that few of Exxon Mobil's new projects are
economically viable in a sub-$50 per barrel oil price environment. Given the current commodity prices and
futures curve, a sub-$50 per barrel long-term price scenario cannot be ignored in the capital commitment
process, no matter how unlikely it might appear to the company's senior decision makers or investors. As a
result, Exxon Mobile has had no choice but to cancel many projects or postpone investment decisions until better
times, reducing the pace of its spending almost in half from two years ago.
While Exxon Mobil continues to harvest strong production volumes originated by heavy investments during the
$100+ per barrel years, the current paltry capital spending raises concerns regarding future production declines.
Stock Price Performance - In A Class Of Its Own

Exxon Mobil's (NYSE:XOM) remains one of the most resilient stocks throughout the current downcycle in oil and
natural gas. Even including the pull-back following the company's Q2 2016 results, the stock continues to
significantly outperform peers in terms of the total return since the beginning of the oil price correction. Since
mid-2014, Exxon Mobil's stock has declined ~23% relative to the S&P-500 index, whereas spot Brent price has
declined by a staggering 62% over the same period.
To appreciate the degree of Exxon Mobil's resilience, it might be helpful to compare the stock's performance to
that of other Oil Majors. I included in the peer group Chevron Corp. (NYSE:CVX), BP plc (NYSE:BP), Total S.A.
(NYSE:TOT) and Eni S.p.a. (NYSE:E). I deliberately excluded Royal Dutch Shell (NYSE:RDS.A) to avoid
distortions associated with the premium Shell paid in its acquisition of BG Group plc (NYSE:BG), the significant
acquisition-related increase in debt and the collapse in LNG pricing that occurred after the acquisition. These
factors make Shell an imperfect peer for purposed of this comparison.
The following graph plots Exxon Mobil's stock price performance versus peers and Brent oil price. All stock moves
are measured relative to the S&P-500 index and have been adjusted for dividends. To further simplify the
comparison, I have grouped the three smaller majors - BP, Eni and Total - into an equal-weighted index.

Exxon Mobil has sustained its strongly differentiated performance all the way throughout this correction, being a
singular standout within the Oil Majors group. Chevron has been a distant second in terms of total return,
whereas the European Oil Majors have suffered severe declines.
Is there a way of rationalizing Exxon Mobil's remarkable resilience and outperformance?
Earnings Per Share Can Be A Poor Measure Of Value Creation
Traditionally, many investors and analysts following Oil Majors focus on earnings per share metrics. In my
opinion, earnings-based ratios applied to Oil Majors have significant limitations and, in some instances, can be
outright misleading. Oil and Gas is a business with long-term investment horizons. A big project can consume
billions of dollars in upfront investment but can generate free cash flow over several following decades. In the
context of this capital intensity, GAAP earnings measures do a notoriously poor job capturing the economic cost

context of this capital intensity, GAAP earnings measures do a notoriously poor job capturing the economic cost
of capital over time and accounting for cost inflation.
To illustrate, imagine a refinery that Company A built twenty five years ago for $2 billion. Company A reports its
earnings using a depreciation expense that to a significant degree reflects investments made long time ago at
then-current costs. Now imagine a similar refinery constructed by Company B two years ago for $10 billion
(inflation and the NIMBY factor adding up to a much higher capital cost). Company B would show a much higher
depreciation expense for its facility. On the surface, Company A may appear vastly more profitable than
Company B. Company A would also be able to showcase a high ROCE metric on a front page in its investor
presentation. However, in this example, the two refineries are similar and are generating equal cash flows.
Moreover, Company B's refinery, being a newbuild facility, is in fact more valuable as it will require less
investment into capital maintenance going forward.
Cash flow and capital efficiency metrics can help to better understand relative financial performance, providing
valuable insights into an Oil Major's financial health, economic returns and competitiveness.
So how is Exxon Mobil doing based on its cash flow measures?
Is Exxon Mobil Making Its Cash Flow Ends Meet?
Exxon Mobil reported second quarter 2016 discretionary cash flow from operations (before changes in working
capital) of ~$6.5 billion, which compares to $6.6 billion in the first quarter of this year.

(Source: Exxon Mobil, July 29, 2016)

The result is a disappointment (almost $1 billion below my model estimate) as oil prices in the second quarter
were ~$12 per barrel higher sequentially, with Brent averaging ~$46 per barrel during the quarter. The lack of a
more solid improvement in cash flow underscores the importance to Exxon's bottom line of worldwide natural
gas and LNG prices, which were sequentially weaker in Q2. Also impacting the result were the sequentially lower
liquids volumes during the quarter, driven by the interruption in Canada due to the wildfires as well as facility
turnarounds, entitlement effects, and natural declines in production. The cash flow was further impacted by
sequentially higher maintenance costs in the Downstream and Chemicals.
Similar to the previous quarter, which reflected exceptionally weak oil prices, Exxon Mobil's discretionary cash

Similar to the previous quarter, which reflected exceptionally weak oil prices, Exxon Mobil's discretionary cash
flow in Q2 was insufficient to fully cover the company's cash requirements. Capital spending in Q2 2016 was
$4.1 billion and dividends and share repurchases added up to $3.1 billion, or $7.2 billion in total. Exxon Mobil
was able to close the gap with asset sales, which generated proceeds of $1.0 billion during the quarter. Total
asset sales proceeds in the last 12 months were $2.5 billion.
Please note that the $1.7 billion increase in debt reported by Exxon Mobil in the second quarter was primarily a
result of working capital requirements and foreign currency translations. Excluding these effects, the company's
net debt for the quarter was little changed (inched lower).
On the surface, it may appear that Exxon Mobil's business model is successful in the current commodity price
environment. Indeed, using the latest quarter result, the company may appear to be able to live within its cash
flow while sustaining its production volumes. Please note that Exxon Mobil's Upstream volumes, excluding the
effect of entitlements and the wildfire disruption in Canada, increased by ~1% year-on-year, based on my
estimate. In the meantime, the stock currently yields 3.4% in dividends and the company was able to reduce its
share count at the end of Q2 2016 by ~0.5% as compared to a year ago. In other words, the run rate of cash
returns to shareholders adds up to ~4% annualized while production is holding up nicely. Given that Exxon Mobil
is doing quite well at the bottom of a severe, protracted downcycle, one might conclude that the stock price
performance is correlated with the current cash flow result and the company is positioned to do even better - in
fact, much better - once the cycle turns.
Cash Flow Analysis Reveals Underwater Stones
Exxon Mobil's relatively healthy balance of cash sources and uses in Q2 was a result of strong underspending
relative to the company's sustainability capital. Over the first half of this year, Exxon Mobil's capital spending
was $8.6 billion, which represents an approximately $17 billion annualized run rate. This is significantly below
the company's planned capital spending of ~$23.2 billion for the full year 2016 and far below the ~$38 billion
the company spent in 2014. If I were to substitute the company's pro-rated 2016 capex guidance amount, which
is ~$5.8 billion per quarter, for the actual capex amount, total funding requirement for capex, dividends and
stock buybacks in 2016 would be almost $9 billion per quarter. In Q2 2016, this equates to a $2.4 billion cash
flow deficit (not including the working capital requirement). Of this deficit, only $1 billion was covered from asset
sales.
In the first quarter of this year, Exxon Mobil's cash flow deficit after asset sales was even wider.

(Source: Exxon Mobil, March, 2016)

Sources Of Funding
Over the last twelve months, Exxon Mobil's net debt increased by $10.7 billion, from $29.4 billion at the end of
Q2 2015 to $40.1 billion at the end of Q2 2016. By comparison, Exxon Mobil's dividend payments during the
same period were slightly over $12 billion - in effect, coming mostly from borrowing.

Given the severity of the downcycle in oil and natural gas, I would consider the company's ability to cover its
capital spending while keeping production approximately flat to be good news, even if dividends are effectively
being paid from borrowing.
Pricing pressures across the industry's supply chain has been one of the factors helping the company on the cash
flow front. Operating costs have declined and capital costs are materially lower. Self-help initiatives have also
yielded improvements. However, the most power cash flow balancing item has been capital spending, which
Exxon Mobil has reduced dramatically.
In the immediate to medium term (which in the world of Oil Majors may mean "several years") the curtailment
in capital spending is unlikely to dramatically alter the production trajectory. Areas that are most impacted are
exploration and new major project starts. Projects in progress, activity aimed at maintaining mature production,
and most promising exploration projects are impacted to a much lesser degree. (The only area where the budget
austerity may be felt strongly already in the immediate term is North American shales, but it represents a
relatively small component of Exxon Mobil's portfolio and may receive reasonable funding, given its strong
impact on production.) While investors may need to be prepared to see stagnant oil volumes or even modest
declines in oil volumes, the real impact on the company's production will not become visible for another
few/several years. Thereafter, however, Exxon Mobil will encounter the same production decline challenges if
faced during the decade from 2000-2010, leading to sharply higher capital budgets and high-cost acquisitions at
the peak of the cycle, including XTO Energy in 2010.
In Conclusion Exxon Mobil has been able to limit its financial leverage creep since the beginning of the
downcycle to moderate amounts. The ~$11 billion increase in net debt in the last 12 months is material but
more than manageable, given the pristine quality of the company's balance sheet.
However, the price of achieving this approximate budget balance has been high. Assuming the current pace of
capital spending, Exxon Mobil would inevitably face an onset of oil production declines. Such production declines
would be difficult to fight off, unless spending is increased materially in the near future. For such spending
increase to be funded on an organic basis, oil prices would need to rise substantially from the current levels.
Furthermore, similar to other Oil Majors, Exxon Mobil's impressive dividend - current yield of 3.4% - has been
effectively a "borrowed dividend." Despite the significant repricing of the industry's supply chain and, as a result,
lower capital and operating costs, the company's operating cash flow has been barely enough to cover a sharply
reduced capital program. The majority of the company's dividend distributions in the last 12 months were funded
via net borrowing. Of note, the average Brent price during that period was ~$44 per barrel, whereas Refining
and Chemical operating margins were robust by historical comparison.
In summary, while Exxon Mobil may be better prepared than many of its peers to survive an extended cyclical
downturn, in a sub-$50 per barrel environment the company's business do not generate enough cash to fund the
company's sustaining capital and pay out dividend at the current level. Therefore, the stock's current price
appears "aspirational" as it reflects an expectation of a strong cyclical recovery in oil and international natural
gas. In my view, the shares are discounting a long-term oil price well above $60 per barrel (i.e., significantly
above what commodity traders are currently prepared to pay for future oil deliveries).

For in-depth data and analysis of commodity fundamentals, please consider subscribing to Zeits OIL ANALYTICS
that provides analysis of the crude oil and natural markets.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant
to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other
advisory capacity. This is not an investment research report. The author's opinions expressed herein address
only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute
for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope,
based on an incomplete set of information, and has limitations to its accuracy. The author recommends that
potential and existing investors conduct thorough investment research of their own, including detailed review of
the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material
is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore,
the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of
the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that
may arise from the use of this material.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the
next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than
from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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