Rising Costs and Political Tensions Could Weigh on Exxon Mobil

Exxon Mobil (NYSE:XOM) is a leading independent oil and gas exploration and production company in the world and competes with other major oil companies like Anadarko (NYSE: APC)  BP (NYSE:BP), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP). The recent political turmoil in Tunisia, Egypt, Libya which is slowly spreading to other Middle Eastern and North African countries is likely to have an impact on Exxon Mobil’s production capacity. This is because the company derives the majority of its revenues from production of crude oil and natural gas liquids (NGLs), and the Middle East and North Africa regions account a sizable portion of its portfolio.

We anticipate Exxon’s crude oil and NGL production will be stable at 1.8 million barrels per day (bpd) by the end of Trefis forecast period. However, Trefis members are optimistic about Exxon Mobil’s potential in the long term, and they predict the firm’s crude oil and NGLs production will touch $2.2 million bpd.

The member estimates imply a 15% upside to our price estimate for XOM stock. We currently have a Trefis price estimate of $78.97 for ExxonMobil’s stock, below the current market price of around $85.

Impact of Political Unrest on Exxon Mobil

Around 25% of Exxon Mobil’s oil & gas production from Asia-Pacific and the Middle East, 22% from Europe, around 15% each from Africa and the United States, and the remaining from Canada and Russia. This suggests that although Exxon Mobil’s oil & gas operations are diversified globally, it has significant exposure to countries that are experiencing political unrest. The process of oil & gas exploration and production is extremely capital intensive and time consuming, and disruptions due to political instabilities only means additional expenses with a delay in the ability of the company to generate returns. We wrote about this in recent notes titled: Unrest in Libya Could Jeopardize BP Exploration Deal, Assessing Jasmine Revolution’s Impact on Exxon Mobil Production, ConocoPhillips Benefits From Higher Oil Prices, Libya Impact Muted.

Exxon Mobil has a fairly large number of projects in the Middle East. A few of these include a joint venture with Qatar Petroleum for development of Qatar’s North Field, operations in Abu Dhabi’s Upper Zakum field, and a joint venture with SABIC in Saudi Arabia.  ^[1]

Rising Costs of Oil Production

Oil production involves heavy upfront costs associated with exploring and developing oil fields. While technological improvements have made things easier and oil discoveries cheaper, costs nonetheless have been going up sharply in the recent years. At times, projects can be affected by cost overruns and delays impacting the company’s profitability. Take for example, Exxon’s projects in the Kipper and Turrum fields in the Gippsland basin off southeast Australia. Mercury was found in the reservoir during drilling at Kipper, delaying the project, while the Turrum project is faced with delays related to structural designs. (See: Outlook for ExxonMobil’s Crude Oil & NGL Production)

Trefis Community Forecast

Trefis members forecast crude oil and natural gas liquids produced by Exxon Mobil will increase from 1.9 million bpd in 2011 to 2.2 million bpd by the end of the Trefis forecast period, compared to the flat Trefis estimate of 1.8 million bpd during the same period. The member estimates imply an upside of 15% to the Trefis price estimate for Exxon Mobil’s stock.

Our complete analysis for ExxonMobil.

1. Enhancing energy prospects in the Middle East and North Africa, Speech by Andrew P. Swiger, Feb 10, 2010 [↩]