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Better Prices, Volume Mix To Fuel Earnings Growth At Exxon

By: Trefis
Posted: 1/31/2014 1:46:00 PM
Referenced Stocks: BOE;BP;LNG;WTI;XOM

Exxon Mobil ( XOM ) is scheduled to announce its fourth quarter and full-year earnings on January 30. We expect the company to post modest earnings growth over last year on higher commodity prices in the U.S. and improved liquids production, partly offset by thinner downstream margins.

While the average West Texas Intermediate ( WTI ) crude oil price has been up by ~11% y-o-y during the fourth quarter, natural gas spot prices have been approximately 13% higher during the same period. This is expected to boost ExxonMobil's fourth quarter and full-year operating margins. Additionally, we also expect ExxonMobil to post better production mix due to higher growth in liquids (crude oil, natural gas liquids, bitumen and synthetic oil) production during the quarter, primarily driven by the ramp up of its Kearl project in Canada and the unconventional plays in the U.S.

During the fourth quarter earnings call, we will be looking for an update on the company's ongoing new project development, specifically the Kearl expansion project in Canada, the liquefied natural gas ( LNG ) project in Papua New Guinea and the Kashagan oil field in Kazakhstan.

Our $96 price estimate for Exxon Mobil is almost in line with its current market price.

See Our Complete Analysis For Exxon Mobil


Better Mix To Boost Upstream Earnings

Exxon's upstream business showed signs of a turnaround during the third quarter of 2013 as production volume, which had been declining for the past two years, finally grew 1.5% y-o-y. More importantly, the growth in production volume was led by liquids, which yield better returns than natural gas. The proportion of liquids in the company's total third quarter production increased to 57% from 55% last year. We believe that the mix would further improve during the fourth quarter, as the company expects its 2013 liquids production to be ~2% higher than in 2012, while natural gas production is expected to decline by ~5% for the full year.

Higher liquids production boosts operating margins for oil companies as they earn more revenues per barrel of oil equivalent ( BOE ) on selling liquids rather than natural gas. Exxon's consolidated subsidiaries sold liquids at an average price of over $100 per barrel in 2012, while the company realized average price of just over $23 per BOE of natural gas. Not just better volume-mix, we expect higher price realizations in the U.S. to also boost Exxon's upstream earnings during the fourth quarter.

Updates On New Project Development

During the fourth quarter earnings call, we will be looking forward to an update on Exxon's ongoing LNG project in Papua New Guinea, which the company reported was more than 90% at the end of the third quarter. Exxon holds a 33% operating stake in the $19 billion project. Scalability, lower costs and proximity to Asian markets that are expected to drive most of the growth in global energy demand over the coming years, are some of the key aspects of this project. The project is also crucial to Exxon's plans of boosting the proportion of liquids and liquids-linked products in its portfolio. (See: Exxon's Papua New Guinea LNG Project Is On Track For Its First Delivery)

Apart from that, 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. The company officials announced during the third quarter earnings call that production from the project, which was ramped up to ~80,000 barrels per day in September, was 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, as the operator is currently investigating the issue.

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: Exxon Readies First Shipment From Huge Kazakhstan Oil Field After Costly Delays)

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