As access to new energy resources becomes increasingly difficult, ExxonMobil Corporation (XOM), like its peer Royal Dutch Shell Plc (RDS.A), is finding it harder to maintain a sound production growth profile. Hence, the oil and gas behemoth plans to spend about $185 billion over the next five years − up 29% from the last five-year period − to unearth more hydrocarbon to meet the growing demand for energy. However, the company expects its oil and gas production to decline 3% this year after a modest rise of 1% in 2011.
Given the surge in global energy demand, which the company estimates to go up by 30%, by 2040, investments of an unprecedented level is required to develop prospective resources. In fact, prospective fields, mostly lying under the ocean floor or in shale rock formations, are becoming rarer and more expensive to develop, requiring state-of-the-art technology to crack them. Consequently, Exxon plans to invest approximately $37 billion per year through the year 2016 that will likely meet 60% of energy requirements over the next three decades while securing its production growth profile.
Exxon’s stepped-up capital expenditure plans would cover as many as 21 important oil and gas projects currently under the anvil and are estimated to accumulate over 1 million net oil-equivalent barrels per day by 2016. Of the total, nine projects will begin in 2012 and 2013, which includes the Kearl Oil Sands development project in Canada, four in West Africa and Kashagan Phase 1 in Kazakhstan. Exxon is also engaged in a large liquefied natural gas project in Papua New Guinea, which is expected to begin deliveries in 2014.
Despite the heightened exploration activities, Exxon sees a 3% year-on-year drop in total output in 2011. The company also cut back its oil and gas production growth guidance to 2%–3% per year during 2009-2014, from the previous expectation of 4%–5%. Liquid production is expected to grow 2% to 3% annually on an average through 2016, while its gas output is expected to climb 0.5% to 1%.
In a low natural gas price environment, the largest natural gas producer − ExxonMobil − is now focusing on gas production though it will look to bring more oil to market in the future.
ExxonMobil is the world’s best-run integrated oil company given its track record of superior return on capital employed. 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. We believe that the super major will retain its leverage to higher oil prices going forward given its significant share in the upstream business.
Although the company remains upbeat on its long-term production profile, increased expenditure with tepid production outlook remains a cause of concern. Exxon’s fourth quarter 2011 production averaged 4.5 million barrels of oil-equivalent per day (MMBOE/d) in the quarter, down 8.8% year over year. Hence, we are concerned about the company’s weak oil and gas production, as well as its exposure to the struggling refining sector. Due to its integrated nature, Exxon is also susceptible to the downside risk from any weakness in the global economy. We maintain a long-term Neutral recommendation on ExxonMobil.
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