Exxon Mobil (NYSE:XOM), the world’s largest oil company, has seen its production decline over the past few quarters which has been more than compensated by increasing oil prices. Total output in terms of energy equivalence decreased by 4% in Q3 2011 over the same period last year. The drop in liquids production was tempered by an increase in gas production. However, the company’s new exploration initiatives in the Gulf of Mexico and in the Russian Arctic and output from its ongoing projects in Iraq and Kazakhstan will help the company increase its production volumes over our forecast period and beyond. Output will also be supported by shale exploration in the U.S. and large LNG projects in Australia. We also expect downstream revenues to grow with increasing energy demand from developing countries. We also cover Exxon’s competitors Chevron (NYSE:CVX) and BP (NYSE:BP)
We have a $93 price estimate for Exxon Mobil, which is at a 10% premium over its current stock price.
Crude production volumes
Crude and other liquids production volumes have declined for Exxon Mobil. Reduced output has been attributed to natural decline in production in mature fields, quota declines for assets in OPEC countries, lower output accruing to Exxon from production contracts because of higher crude prices and divestments. However, we do not expect the fall in output volumes to continue in the long term. Exxon made a major discovery in the Gulf of Mexico last year and will begin work on the Julia deepwater fields in the same region soon. More exploration is expected to happen in the U.S. with the government selling leases in the GoM and granting licenses in Alaska.
Internationally, Exxon has been very active in securing new resources. In 2011, Exxon managed to win an exploration deal with Russian player Rosneft to explore blocks in the Arctic. Its project in the West Qurna field also showed progress and the company also entered into a controversial agreement with the Kurdish government to start exploration in the oil rich northern region of Iraq. Exxon and its partners are also involved in the Kashagan project in Kazakhstan, which is one of the major development project.
In the U.S., shale exploration is helping Exxon increase its gas output. Exxon made its first major move in shale with its acquisition of XTO Energy in 2010. In 2011, the company acquired a few smaller companies and also added acreage in the Utica shale play. Shale now contributes to about a third of the gas output in the U.S and has helped the country become the world’s largest producer of natural gas.
Higher gas production has put gas prices under pressure in the U.S.. However, international prices have remained strong because of the demand from Asian countries. Exxon is also a partner in the $15.7 billion Papua New Guinea (PNG) LNG project in Australia. Oil majors have piled up multi-billion dollar LNG projects in Australia aimed at supplying the growing economies of Asia.
Capital expenditures and oil prices
Capital expenditures on exploration and production (E&P) have increased over the last few years. Many projects have seen costs rise over the last few years including the Kashagan project and the Papua New Guinea LNG project. Exploitation of shale is also costlier than the development of traditional reserves. With most new discoveries located either in deepwater sectors or in remote and politically risky geographies, E&P costs will continue to rise over the future.
However, higher costs are being offset by rising oil prices. Crude prices have risen in 2011 despite growth concerns in Europe. We expect oil prices to continue to increase over the next few years in the absence of any major economic shocks. Our forecast ‘smooths’ the variations in commodity prices and shows a mean expectation of the increase in oil prices.