Friday, July 11, 2014

Exxon Mobil Goes Where Few Oil Giants Tread

This article was originally published by TheStreet on July 3, 2014

By Sarfaraz A. Khan
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.
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 thatEurope 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 aseries 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.