Exxon Heads to $92 Using Oil Profits to Bet on Gas
Exxon Mobil (NYSE:XOM) posted a 41% growth in Q2 profits over the same period last year. [1] Most of the growth in profits was a result of better realizations from upstream activity while earnings from downstream and chemicals business grew more moderately as a result of weakness in the global macroeconomic picture. The company also reported a slight decrease in profits resulting from changes in the the volume and mix of its upstream output. Other highlights included the strong push towards the development of unconventional resources in the U.S. as well as in other countries. Exxon competes with other oil majors such as Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), BP (NYSE:BP) and the Royal Dutch Shell (NYSE:RDS).
We have a $92.40 price estimate for Exxon Mobil, which is around a 15% premium over its market price.
Changes in mix temper upstream profits
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Upstream volumes increased by 10% to 4.4 million barrels of energy equivalent / day (mboe/d) as the company produced a higher proportion of natural gas due to the acquisition of XTO Energy which was completed towards the end of June last year. [2]
A higher proportion of natural gas sales has resulted in a negative impact of $-1.06 billion on upstream earnings as gas prices continue to remain depressed because of excess production in the U.S. However the company is looking to reverse the trend by developing its liquids portfolio by funding projects in Canada, Indonesia and Iraq. It is also involved in further exploration in the Turkish Black Sea and the U.S. Gulf of Mexico.
In the unconventional’s space, Exxon further consolidated its position by acquiring Phillips Resources and it has also expanded its unconventionals portfolio outside of the U.S. with shale gas projects in Argentina, Canada, Columbia, Germany and Poland. The company is also pursuing a gas project in China and is drilling its third coal bed methane well in Indonesia.
Downstream and chemicals earnings moderate
Exxon reported a 11% y-o-y increase in its Q2 downstream earnings boosted by better margins and more favorable volume and mix characteristics. However its chemicals earnings declined slightly by 3% as lower volumes offset a growth in margins.
While rivals such as ConocoPhillips and Marathon Oil have announced plans to divest their downstream businesses to focus on exploration and production, Exxon holds that its vertical integration provides tremendous value to its overall business and that its investments in downstream technology provide it with a competitive edge in the oil business.
We estimate that its downstream operation including refining, marketing, trading, transportation and chemicals contribute to 23% of our estimate for the company. [3]
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Notes:- Second Quarter 2011 Earnings, Exxon Mobil [↩]
- Exxon Mobil completes XTO Energy acquistion, Market Watch [↩]
- Exxon Mobil Management Discusses Q2 2011 Results – Earnings Call Transcript – Q&A, Exxon Mobil Transcript – Seeking Alpha [↩]