Exxon Mobil (NYSE:XOM) recently shipped its first liquefied natural gas (LNG) cargo from the Papua New Guinea (PNG) LNG project months ahead of schedule. Production from the first LNG train started last month. Recently, the second train also started producing liquefied form of the cleaner burning hydrocarbon fuel as additional upstream wells came online. This start-up falls in line with Exxon Mobil’s current strategy of boosting the proportion of liquids (crude oil, natural gas liquids, bitumen and synthetic oil) and LNG in its portfolio for better margins. 
We currently have a $96 price estimate for Exxon Mobil, which values it at around 11.9x our 2014 GAAP diluted EPS estimate of $8.05 for the company.
Exxon holds a 33.2% operating stake in the $19 billion PNG LNG project. It is a 6.9 million ton per annum (MTPA) integrated LNG project operated by Esso Highlands Limited, a subsidiary of Exxon Mobil Corporation. It is expected to produce over 9 trillion cubic feet (tcf) of gas and 200 million barrels of associated liquids over its life. The gas is being sourced from the Hides, Angore and Juha gas fields, and from associated gas in the Kutubu, Agogo, Moran and Gobe Main oil fields. After being liquefied at the LNG plant, the gas is loaded onto ocean-going tankers to be shipped to the key Asian LNG markets. 
The share of LNG in global natural gas trade has grown steadily over the past few years, primarily due to the fact that natural gas imports by Asian markets, which rely mostly on LNG (~80%), have been growing at a much faster rate than the rest of the world. Therefore, being located closer to the center of demand is a key advantage for the PNG LNG project over many other upcoming projects around the world, as lower transportation costs reduce the total per unit cost of delivered LNG. By our estimates, shipping LNG from PNG to Japan would cost anywhere between $0.5 to $1 per million British thermal units (MMBTU), cheaper than the upcoming LNG projects on the U.S. Gulf Coast and East Africa. (See: What’s Driving The Global LNG Demand)
Apart from lower shipping costs, the PNG LNG project also boasts of lower development costs. At $19 billion, the project’s total cost comes out to around $2.75 billion per million ton per annum (MTPA) of LNG capacity. In comparison, the Chevron-operated Gorgon LNG project in Australia, which is under construction currently, is expected to cost around $54 billion or $3.46 billion per MTPA of LNG capacity. So, the PNG LNG project gives Exxon the low-cost advantage in the Asia-Pacific region.
Amid depressed natural gas prices in North America, energy companies are increasingly focusing on boosting their production of liquids and LNG to realize better upstream margins. Exxon is not an exception to this trend. In fact, it has been one of the most affected companies by the sharp decline in U.S. natural gas prices. This is because its production-mix was significantly impacted after it 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 production growth came from the U.S., where natural gas prices have not been favorable to the company’s upstream earnings since. 
However, Exxon is now focusing on liquids and LNG production growth to boost its upstream earnings. Liquids and LNG projects are expected to contribute more than 90% to the company’s planned production ramp-up of 1 million barrels of oil equivalent per day by 2017. Liquids are generally 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.
According to our estimates, the PNG LNG project is expected to boost Exxon’s annual liquids and LNG production volume by more than 60,000 barrels of oil equivalent (BOE) per day at its peak, which is equivalent to more than a 4% increase in the average liquids production rate achieved by the company’s subsidiaries in 2013. Notes: