We maintain our Neutral recommendation on
ExxonMobil Corporation
(
XOM
) given its track record of superior return on capital employed
(ROCE), its extensive investment program as well as diversified
operations. However, these strengths are somewhat undermined by its
continued disappointing production trend.
ExxonMobil is the world's largest publicly traded oil company,
engaged in oil and natural gas exploration and production,
petroleum products refining and marketing, chemicals manufacture,
and other energy-related businesses.
The company has a track record of superior ROCE relative to its
peers. It is in excellent financial health and has an AAA credit
profile. Exxon's free cash flow generation remains strong. The
company returned $7.7 billion to shareholders through dividends and
share buybacks during the second quarter, a trend we expect would
increase in the near term.
ExxonMobil also remains active in its investment program and plans
to spend about $185 billion over the next five years - up 29% from
the last five-year period. The capex covers as many as 21 important
oil and gas projects currently under the anvil and are estimated to
accumulate over 1 million net oil-equivalent barrels per day by
2016.
Of the total, nine projects will begin in 2012 and 2013. These
include the Kearl Oil Sands development project in Canada, four in
West Africa and Kashagan Phase 1 in Kazakhstan. Exxon is also
engaged in a large liquefied natural gas project in Papua New
Guinea, which is expected to begin deliveries in 2014.
The company has diversified operations spanning the world. While it
functions in all corners of the globe, the main areas of focus for
the coming years include the U.S., Canada, Kazakhstan, West Africa,
Australia, Russia, Angola and Iraq for new volumes. On the
exploration front, it includes unconventional natural gas across
North America and in offshore regions, including the Gulf of
Mexico. Notably, Exxon achieved success in the exploration of a
well in offshore Tanzania, where it came across a massive amount of
recoverable gas of high quality.
Despite the collapse in natural gas prices, Exxon expects
unconventional gas to play a dominant role in future supplies owing
to the rapid decline in conventional production. The company
possesses more than 8 million unconventional acres in North
America.
However, we remain skeptical about the company's continued
disappointing production trend. Its second quarter 2012 production
level decreased more than 5% year over year. The company also
maintained that its oil and gas production would decline 3% in 2012
after a nominal rise of 1% in 2011. We see ExxonMobil struggling to
consistently grow production volumes over time.
Again, with natural gas accounting for approximately half of
ExxonMobil's second quarter 2012 production, we remain cautious due
to the tempered outlook on natural gas prices for the next several
years. We believe this will adversely impact the company's
earnings, returns, cash flow and balance sheet.
At the end, we expect the company to perform in line with the
market. ExxonMobil, the largest natural gas producer in the U.S.
ahead of
Chesapeake Energy Corporation
(
CHK
), holds a Zacks #3 Rank (short-term Hold rating).
CHESAPEAKE ENGY (CHK): Free Stock Analysis
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EXXON MOBIL CRP (XOM): Free Stock Analysis
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