Exxon’s LNG Project Gets Smacked by Rising Aussie Dollar

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Exxon Mobil (NYSE:XOM) could see costs from its Papua New Guinea (PNG) LNG joint venture rise by $700 million, its partner Oil Search announced today. The $15.7 billion LNG export project could see costs escalate by 5% because of appreciation in the Australian Dollar (in which the investment is denominated). [1] This is the second significant budget increase that Exxon has seen in Australia and Papua New Guinea. Almost all major energy players, including Chevron (NYSE:CVX), are pumping in around $180 billion in the coming years to develop the region’s vast natural gas reserves. We have a $93 price estimate for Exxon which is about 15% ahead of its current market price.

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Resource rush pushing up costs

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The Australian economy has seen major changes over the past few years as energy and natural resource companies are investing into huge projects to meet the demand from resource-hungry China. In particular, the expected growth in LNG usage in China and other Asian economies has resulted in close to a dozen massive LNG projects. The capital intensive nature of the projects and the scale of the undertakings makes delays and cost overruns occur very often. Exxon holds a 33.2% stake in the PNG venture which is financed with a 70:30 debt to equity ratio. [1]

The scale of activities in Australia is resulting in the Australian dollar appreciating against other major currencies and creating a shortage of raw materials and skilled labor. Despite these challenges the PNG project is expected to start sales in 2014 as planned mainly to client in China, Japan and Taiwan. [1] In January, ExxonMobil announced that two of its natural gas and liquids development projects in Western Australia, originally expected to come into production in 2011, will be delayed and that their costs would increase from an initial estimate of $2.7 billion to $4.4 billion. We expect Exxon’s capital expenditures to decline as a percentage of revenues over the next few years as the increase in the cost of exploration will be offset by a rise in the price of oil and gas.

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Notes:
  1. Exxon’s Papua New Guinea Project Hit by Aussie Dollar, WSJ [] [] []