We are maintaining our Neutral recommendation for the world’s largest publicly traded oil company, ExxonMobil Corporation (XOM).
The company’s extensive upstream operations remain somewhat balanced by its relatively low 2011 production growth guidance of 3% to 4% year over year.
ExxonMobil has long been a core holding for investors seeking a defensive name with continued dividend growth. Given its significant share in the upstream business (accounting for roughly 81% of first quarter 2011 net income), we believe it will retain its leverage to higher oil prices going forward.
The company also remains fairly active in its investment program, which is reflected by a $34 billion capital expenditure budget for 2011. ExxonMobil plans to invest $33 billion to $37 billion annually through 2015, while maintaining its production growth target of 3% to 4% in 2011 and 4% to 5% per year on average through 2014. Significant exploration successes in its wide ranging 2011 program, with key wells in the Gulf of Mexico (GoM), the Black Sea, Tanzania and Argentina are believed to be major catalysts going forward.
Exxon also made two major oil discoveries and a gas discovery at its Deepwater Hadrian North and South prospects in the Gulf of Mexico. The resource potential of the Keathley Canyon blocks, where the prospects are located, is believed to be in excess of 700 million barrels of oil equivalent (MMBoe) (350 MMBoe net). More than 85% of this resource is believed to be oil. Exxon management remains highly optimistic about the discovery, which is one of the largest in the GoM in the last decade, and plans to work closely with other companies through joint ventures for maximum development and utilization of the resource.
With the XTO acquisition, ExxonMobil is enjoying access to significant unconventional resources and is now getting a major handle on North America's newest energy discoveries, as it looks forward to the growth of natural gas in expanding its share of the world's largest energy market. Hence, the integration is acting as a positive catalyst and the company achieved another XTO-inspired double-digit rise in production last quarter.
However, we remain disappointed by the company’s relatively low 2011 production growth guidance of 3% to 4% from the year-ago period. Particularly, after the full-year contribution from XTO, a lower guidance for 2011 implies an equivalent drop for organic production.
Again, although the company replaced over 100% of its proved reserves in 2010, this depended largely on XTO volumes. However, its replacement rate was only 45% on an organic basis.
Recently, a company-operated pipeline running into the Yellowstone River in south central Montana ruptured, spilling hundreds of barrels of crude oil into the river. Being well aware of the crisis that the incident can lead to, the company remains focused toward health and safety issues of its employees as well as the regional population.
We expect the company to perform in line with its peers Chevron Corp. (CVX) and ConocoPhillips (COP), and it retains its Zacks #3 Rank (short-term Hold rating).
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