Energy major Exxon Mobil (NYSE:XOM) admitted that it was currently losing money on natural gas sales in the U.S. because of low prices.  Natural gas prices in the U.S. dropped below $2 / Million British thermal units (MBtu) after a weak winter exacerbated the oversupply situation in the natural gas industry in the U.S. Until recently, Exxon had backed its natural gas exploration plans in the U.S. as a ‘long term’ play, refusing to follow other players in announcing production cuts because of low prices. However, continued pricing pressure is forcing the company to rethink its position on the matter. Low natural gas prices weighed in on Exxon’s results in Q1 and analysts estimate that the company’s price realization from the commodity may drop further in Q2.
We have a $94 price estimate for Exxon Mobil, which is at a 10% premium to its current market price.
Exxon, a latecomer to the shale gas industry, became the largest natural gas producer in the U.S. after its $26 billion acquisition of XTO Energy in 2010. Since then natural gas prices in the U.S. have collapsed because of overproduction, but Exxon has continued its spending on gas exploration and production.
The company refused to reciprocate production cuts of its competitors to help increase prices. Exxon’s deep pockets mean that the company can outlast other companies in a low pricing environment. However, the company has finally admitted that it was being hurt by the low prices. Exxon earned about $2.7 4 / MBtu in Q1 from its natural gas sales in the U.S.  Analysts expect the earnings to fall lower in the present quarter. The low gas prices will coincide with falling oil prices, impacting the company’s overall results.
Exxon is already pursuing options to export gas from the U.S. to international markets, where the price of the clean burning fuel is much higher. The energy giant is also shifting focus to liquid rich plays and is designing drilling programs to evaluate the long term prospects on some of its gas fields.  Production cuts from Exxon could help raise the price of natural gas in the U.S., and help it improve its overall margins.
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