ExxonMobil’s considerable investment in long-term projects and the sometimes difficult tas...

ExxonMobil’s considerable investment in long-term projects and the sometimes difficult task of having projects come in on budget. How are project cash flows affected by budget overruns? In the capital budgeting process, how should financial managers account for the potential of budget overruns?

ExxonMobil

Maintaining Its Project Inventory

As the largest publicly traded oil company in the world, ExxonMobil’s long-term investments are at the heart of its ability to generate shareholder wealth. Its 2009 earnings of more than $19 billion resulted in a 16 percent return on capital invested. Through dividends and share repurchases, ExxonMobil returned $26 billion to its shareholders in 2009 and more than $150 billion over the previous five years.

To maintain its petroleum reserves, ExxonMobil must continually add to its inventory of discovered oil and gas resources. It holds exploration rights to 109 million undeveloped acres in 37 countries. Each year, the company initiates a number of megaprojects that add to its exploration rights, locate and “prove” additional reserves, or increase the productivity of currently producing wells.

Total capital and exploration expenditures in 2009 amounted to a record $27 billion. Within the next 5 years, ExxonMobil anticipates investing more than $125 billion. ExxonMobil has partnered with Qatar Petroleum to develop a global-scale petrochemical complex in Ras Laffan Industrial City, Qatar. The plant is expected to start up in late 2015, and it will include two 650,000 ton-per-year polyethylene plants, a 1.6 million-ton-per-year steam cracker, and a 700,000 ton-per-year ethylene glycol facility.

While Exxon is often able to bring in projects on or under budget, increasing costs could cause some future development projects to go over budget. Drilling and exploration costs are expected to rise. Recent high oil prices have led to a surge in demand for exploration, and the cost of drilling equipment and workers has jumped at least 15 percent a year during the last several years. Further complicating oil production efforts in the future will be an increase in the use of less-than-suitable oil sources, such as shale oil and tar sands.

Like ExxonMobil, every firm must evaluate the costs and returns of projects for expansion, asset replacement or renewal, research and development, advertising, and other areas that require a long-term commitment of funds in expectation of future returns. Chapter 11 explains how to identify the relevant cash outflows and inflows that must be considered in making major investment decisions.