Lower Production, Oil Prices, To Drag Down Exxon’s Q4 Earnings

-0.98%
Downside
116
Market
115
Trefis
XOM: Exxon Mobil logo
XOM
Exxon Mobil

Exxon Mobil (NYSE:XOM) is scheduled to announce its 2014 fourth quarter earnings on February 2. We expect lower crude oil prices to weigh significantly on the company’s upstream earnings growth. Benchmark crude oil prices have declined sharply over the past few months on rising supplies and falling demand growth estimates. The average Brent crude oil spot price declined by more than 30% year-on-year during the fourth quarter. However, we expect better upstream volume-mix due to higher growth in liquids (crude oil, natural gas liquids, bitumen, and synthetic oil) production, primarily driven by the ramp up of the Kearl project in Canada and the development of unconventional plays in the U.S., coupled with thicker downstream margins to partially offset the impact of lower oil prices on Exxon’s overall performance. During the earnings conference call, we will be looking for an update on Exxon’s ongoing new project development, specifically the Kearl expansion and the Hibernia Southern expansion projects in Canada and the Kashagan oil field in Kazakhstan. We will also be looking for an update on its operating strategy under the changed crude oil price environment.

Exxon Mobil is the world’s largest publicly traded international Oil and Gas Company. It generates annual sales revenue of more than $420 billion with a consolidated adjusted EBITDA margin of ~14.7% by our estimates. We currently have a $98/share price estimate for Exxon Mobil, which values it at around 13.2x our 2015 full-year diluted EPS estimate of $7.43 for the company.

See Our Complete Analysis For Exxon Mobil

Relevant Articles
  1. Down 9% Since The Beginning of 2023, What Should You Expect From Exxon Mobil Stock?
  2. Will Exxon Mobil Stock Trade Higher Post Q2?
  3. What’s Happening With Exxon Mobil Stock?
  4. Exxon Mobil Stock Likely To Trade Lower Post Q4
  5. What To Expect From Exxon Mobil’s Stock Post Q2?
  6. Can Amazon Stock Add Two Exxon Mobils To Its Market Capitalization?

Lower Hydrocarbon Production

We expect Exxon’s upstream earnings to decline during the fourth quarter on lower crude oil prices and negative hydrocarbon production growth, primarily due to the expiry of the Abu Dhabi onshore concession agreement. The company lost its 75-year rights to the emirate’s oldest producing fields in January 2014, when the Second World War-era contract expired. These oilfields together account for around 50% of Abu Dhabi’s total oil output (almost 3 million barrels per day) and hold more than a 100 billion barrels of oil and oil equivalent. [1]

Until a new concession agreement is signed, Abu Dhabi National Oil Company (ADNOC) will be the sole-risk shareholder of the Abu Dhabi Company for Onshore Oil Operations (ADCO), the current concession’s joint-venture operator. As a result, Exxon and other foreign oil companies, which were previously involved in the concession, will not be able to lift equity oil or book reserves from these oil fields. During the first nine months of 2014, Exxon’s average daily net hydrocarbon production declined by around 5.3% y-o-y, primarily due to the expiry of the Abu Dhabi concession agreement. We expect to see a similar variance in volumes during the fourth quarter as well. [2]

Better Production Volume Mix

Exxon’s total hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen, and synthetic oil, and natural gas. Liquids made up more than 60% of Exxon’s total hydrocarbon production in 2009. However, their percentage contribution declined 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 been more profitable to produce than natural gas because of higher price realizations. In 2013, 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. [3]

During the first nine months of 2014, Exxon’s total liquids production increased by over 31,000 barrels per day, or almost 1.5% y-o-y, excluding the impact of the Abu Dhabi onshore concession expiry. On the other hand, its natural gas production declined by more than 700 million cubic feet per day, or almost 6% y-o-y. Although, lower weather-related demand in Europe exaggerated the decline in natural gas production during the first quarter, we expect the overall trend of improving volume-mix to manifest itself in Exxon’s fourth quarter earnings as well. The company expects its liquids production to grow by almost 2% y-o-y and natural gas production to decline by around 3% for the full year 2014. This is expected to improve Exxon’s price realization per barrel of oil equivalent and potentially help reduce the impact of lower oil prices on its unit profitability. [2]

Key Upstream Project Updates

During the fourth quarter earnings call, we will be looking forward to an update on Exxon’s Kearl expansion project in Canada. Located 70 kilometers north of Fort McMurray, the Kearl oil sands project holds an estimated 4.6 billion barrels of recoverable bitumen resource and is expected to remain in production for as long as 40 years. The production of mined diluted bitumen from the first of the three froth treatment trains at the project began in April 2013.

The initial development phase of the project is currently being ramped up and reached over 100,000 barrels of bitumen production per day by the end of the third quarter, up from 47,000 barrels per day in the fourth quarter of 2013. In addition, Exxon is also working on the expansion of the Kearl oil sands project, which is expected to boost its gross production capacity by a 100,000 barrels per day by the end of this year. Beyond the expansion phase, further debottlenecking of the Kearl oil sands project is expected to boost its total gross output to around 345,000 barrels per day. [2]

In addition to the Kearl oil sands project, 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. During the 2014 second quarter earnings call presentation, the company officials announced that production from the project, which was ramped up to almost 80,000 barrels per day in September 2013, continued to remain 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. However, a recent report suggested that the project might not produce any oil until at least 2016 because of a major pipeline replacement requirement. [4]

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: Kashagan To Continue To Weigh On Exxon’s Returns)

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Notes:
  1. Abu Dhabi to Run Onshore Oilfields as Foreign Tie-Ups End, bloomberg.com []
  2. Exxon Mobil Corporation 3Q14 Earnings Presentation Slides, exxonmobil.com [] [] []
  3. Exxon Mobil 10-K Filings, sec.gov []
  4. Production At Kazakhstan’s Kashagan Oil Field Halted Until 2016, wsj.com []