International Assets Will Boost Exxon’s Upstream Production

Exxon Mobil‘s (NYSE:XOM) upstream production declined by nearly 6% over 2012, weighing on the company’s earnings for the full year. For 2013, the company expects crude oil output to grow at around 2%. However, a 5% expected decline in natural gas production will likely drag total upstream production down by about 1% below 2012 levels. ^[1] Going forward, however, the company expects major projects to start operations and help increase production levels at a rate of 2-3% per year during the 2014-17 period.

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Low Natural Gas Prices To Hurt Production In 2013

The key reasons cited for a decline in upstream production in 2012 were operational downtime in upstream projects and stagnant energy prices which made new production difficult. With the world economy not showing any major signs of recovery, demand for energy is expected to remain slow over 2013 as well. Natural gas, in particular, is notorious for its price volatility. Its demand has taken a major hit over the past year with prices in some US states hitting their lowest levels in over 20 years. This trend is expected to continue in 2013, making it unfeasible for companies such as Exxon to pump up production volumes.

International Production To Pick Up Pace During 2014-17

In the long run, however, Exxon is hoping that the huge investments it’s making in bulking up its upstream portfolio will help in the recovery of total production levels. Some examples include drilling stations in the Arctic in partnership with Russian energy giant Rosneft and offshore rigs in Tanzania. The company has around 22 such assets lined up to start production between 2014-17, making its targeted production growth rate of 2-3% over 2014-17 look achievable. To support this, Exxon plans to spend over $190 billion on exploration and development over the next five years. Investors should note that most of  the upstream projects in progress are geared more towards crude oil rather than natural gas, which should help stabilize upstream earnings. ^[2]

Our outlook on the company’s upstream production is also positive. We expect Exxon’s upstream crude oil and NGL production to increase steadily over the long term driven primarily by international investments. Increasing demand for energy in emerging economies is also expected to play a key role in keeping crude oil prices high, providing enough incentives for oil companies like Exxon to increase production.

We currently have a Trefis price estimate of $98 for Exxon Mobil, which is around 10% above the market price.

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1. Exxon Investor Relations – Analyst Meeting 2013 [↩]
2. “Exxon Mobil Predicts Lower Production“, CBS Local,  March 2013 [↩]