Exxon’s Earnings To Receive A Boost From Higher Gas Prices, Better Mix

Exxon Mobil (NYSE:XOM) is scheduled to announce its 2014 first quarter earnings on May 1. We expect the company to post modest earnings growth over last year on higher natural gas prices in the U.S. and improved liquids production, partly offset by thinner downstream margins.

The average Europe Brent crude oil price was more than 5% lower year-on-year during the first quarter and is expected to negatively impact Exxon’s crude oil revenues. However, natural gas prices in the U.S. were significantly higher because of an unusually cold winter, which forced consumers to use more heat and electricity. Spot henry hub prices were up more than 45% y-o-y due to a precipitous decline in natural gas inventories in the domestic market. This is expected to boost ExxonMobil’s first quarter operating margins.

We also expect ExxonMobil to post better sales volume mix due to higher growth in liquids (crude oil, natural gas liquids, bitumen and synthetic oil) production during the quarter, primarily driven by the ramp up of its Kearl project in Canada and the unconventional plays in the U.S.

During the earnings call, we will be looking for an update on the company’s ongoing new project development, specifically the Kearl expansion project in Canada, the liquefied natural gas (LNG) project in Papua New Guinea and the Kashagan oil field in Kazakhstan.

Our $92 price estimate for Exxon Mobil is almost in line with its current market price.

See Our Complete Analysis For Exxon Mobil

Flat Production

Exxon’s upstream production has been relatively flat over the past decade. It actually declined slightly from over 4.21 million barrels of oil equivalent per day (MMBOED) in 2004 to 4.17 MMBOED in 2013. This has also been a case with most of the other large integrated oil and gas players, as they have been unable to add enough new production to more than offset natural field declines. This could partly be attributed to the shear size of these firms, and also fact finding and developing large hydrocarbon reserves is getting more and more difficult. ^[1]

However, Exxon expects to ramp up its upstream production to ~4.5 MMBOED by 2017 as it progresses on its plan to add 1 MMBOED of new production between 2012 and 2017. The company is banking on a number of new project start-ups to achieve this target. As many as ten of these projects are scheduled to start-up this year itself, including the liquefied natural gas (LNG) project in Papua New Guinea, first oil from the Arkutun-Dagi field offshore Russia’s Sakhalin island and the Cold Lake Nabiye expansion project in Canada. However, Exxon expects its net hydrocarbon production to remain relatively flat this year, as these new project are not expected to ramp-up substantially until next year. Beyond 2014, the company expects its upstream production to grow at 2-3% CAGR till 2017. ^[2]

Better Volume Mix

Exxon’s total hydrocarbon production can be broadly split into two categories – liquids and natural gas. Liquids made up more than 60% of Exxon’s total hydrocarbon production in 2009. However, the percentage contribution reduced significantly after the company acquired XTO for $41 billion in 2010, which increased its natural gas production by 31% y-o-y that year. More importantly, most of the increase came from the U.S., where natural gas prices have been significantly depressed by international standards due to a sharp rise in production from unconventional sources. (See: Key Trends Impacting Natural Gas Prices In The U.S.)

Liquids have generally become more profitable to produce than natural gas because of higher price realizations. Last year, Exxon sold liquids at an average price of around $95 per barrel, compared to just around $41 realized per barrel of oil equivalent (BOE) of natural gas. This is the reason why the company has been trying to improve the proportion of liquids in its production mix over the last couple of years. In 2013, liquids made up 52.7% of Exxon’s total hydrocarbon production, up from 51.5% in 2012. This year, the company plans to boost it further as it expects liquids production to grow by ~2% y-o-y and natural gas production to decline by around 2%.

Key Project Updates

During the first quarter earnings call, we will be looking forward to an update on Exxon’s LNG project in Papua New Guinea, which recently came online. Exxon holds a 33% operating stake in the $19 billion project. Scalability, lower costs and proximity to Asian markets that are expected to drive most of the growth in global energy demand over the coming years, are some of the key aspects of this project. The project is also crucial to Exxon’s plans of boosting the proportion of liquids and liquids-linked products in its portfolio. (See: Exxon’s LNG Production To Receive A Boost This Year)

Apart from that, we will also be looking for an update on the giant Kashagan project, which is also expected to play a crucial role in Exxon’s future production ramp-up plans. The company officials announced during the last earnings call that production from the project, which was ramped up to ~80,000 barrels per day in September, was shut due to leakage in a gas pipeline connecting one of the drilling islands to the onshore processing facility. The officials declined to provide a timeline for the restart of production from Kashagan, as the operator is currently investigating the issue.

The mega oil project located in Kazakhstan’s zone of the Caspian Sea has already been plagued by significant delays and cost overruns due to several technical issues. This has also delayed returns from the project thereby increasing the amount of time that participating oil companies such as Exxon Mobil will have to wait in order to generate a desired rate of return upon their investments. (See: Costly Delays In Bringing Up Kashagan Weighing On Oil Companies’ Returns)

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1. Exxon SEC Filings, sec.gov [↩]
2. Exxon Mobil 2014 Analyst Meeting, exxonmobil.com [↩]