Exxon Mobil is scheduled to announce its 2014 third quarter earnings on October 31. We expect lower crude oil prices to weigh on the company’s upstream earnings growth. Benchmark crude oil prices have declined sharply over the past few weeks on rising supplies and falling demand growth estimates. The average Brent crude oil spot price declined by almost 8% year-on-year during the third quarter and will negatively impact the company’s crude oil revenues and operating margins. On the other hand, spot Henry Hub natural gas prices were up more than 11% y-o-y during the last three months, primarily due to lower inventories compared to last year. Since nearly 53% of the total natural gas produced by Exxon’s subsidiaries comes from the U.S., higher Henry Hub gas prices are expected to boost the company’s upstream earnings. In addition to higher natural gas prices in the U.S., we expect Exxon’s earnings to also benefit from 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 earnings conference call, we will be looking for an update on Exxon’s ongoing new project development, specifically the Kearl expansion and the Hibernia Southern expansion projects in Canada, the Banyu Urip project in Indonesia and the Kashagan oil field in Kazakhstan.
Exxon Mobil is the world’s largest publicly traded international Oil and Gas Company. It generates annual sales revenue of more than $420 billion with a consolidated adjusted EBITDA margin of ~14.7% by our estimates. We currently have a $107/share price estimate for Exxon Mobil, which values it at around 13.4x our 2014 GAAP diluted EPS estimate of $7.96 for the company.
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Lower Hydrocarbon Production
We expect Exxon’s upstream earnings to decline during the third quarter on lower crude oil prices and negative hydrocarbon production growth, primarily due to the expiry of the Abu Dhabi onshore concession agreement. The company lost its 75-year rights to the emirate’s oldest producing fields this January, when the Second World War-era contract expired. These oilfields together account for around 50% of Abu Dhabi’s total oil output (almost 3 million barrels per day) and hold more than a 100 billion barrels of oil and oil equivalent.
Until a new concession agreement is signed, Abu Dhabi National Oil Company (Adnoc) will be the sole-risk shareholder of the Abu Dhabi Company for Onshore Oil Operations (Adco), the current concession’s joint-venture operator. As a result, Exxon and other foreign oil companies, which were previously involved in the concession, will not be able to lift equity oil or book reserves from these oil fields. During the first half of this year, Exxon’s average daily hydrocarbon production declined by around 5.6% y-o-y, primarily due to the expiry of the Abu Dhabi concession agreement. We expect to see a similar variance in volumes during the third quarter as well.
Better Production Volume Mix
Exxon’s total hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen and synthetic oil, and natural gas. Liquids made up more than 60% of Exxon?s total hydrocarbon production in 2009. However, its percentage contribution declined significantly after the company acquired XTO for $41 billion in 2010, which increased its natural gas production by 31% y-o-y that year. More importantly, most of the increase came from the U.S., where natural gas prices have been significantly depressed by international standards due to a sharp rise in production from unconventional sources. (See: Key Trends Impacting Natural Gas Prices In The U.S.)
Liquids have generally become more profitable to produce than natural gas because of higher price realizations. Last year, Exxon sold liquids at an average price of around $95 per barrel, compared to just around $41 realized per barrel of oil equivalent of natural gas. This is the reason why the company has been trying to improve the proportion of liquids in its production mix over the last couple of years. Last year, liquids made up 52.7% of Exxon’s total hydrocarbon production, up from 51.5% in 2012.
During the first half of this year, Exxon?s total liquids production increased by over 40,000 barrels per day, or almost 2% y-o-y, excluding the impact of the Abu Dhabi onshore concession expiry. On the other hand, its natural gas production declined by more than 900 million cubic feet per day, or more than 7.3% y-o-y. Although, lower weather-related demand in Europe exaggerated the decline in natural gas production during the first quarter, we expect the overall trend of improving volume-mix to manifest itself in Exxon’s third quarter earnings as well. The company expects its liquids production to grow by ~2% y-o-y and natural gas production to decline by around 3% for the full year. This is expected to drive better price realization per barrel of oil equivalent and improve its unit profitability.Key Upstream Project Updates
During the third quarter earnings call, we will be looking forward to an update on Exxon’s Kearl expansion project in Canada. Located 70 kilometers north of Fort McMurray, the Kearl oil sands project holds an estimated 4.6 billion barrels of recoverable bitumen resource and is expected to remain in production for as long as 40 years. The production of mined diluted bitumen from first of the three froth treatment trains at the project began in April last year.
Article source: http://www.rte.ie/ten/news/2014/0920/645156-leonard-cohen-at-80-i-like-life-on-the-road/
Exxon Mobil is scheduled to announce its 2014 third quarter earnings on October 31. We expect lower crude oil prices to weigh on the company’s upstream earnings growth. Benchmark crude oil prices have declined sharply over the past few weeks on rising supplies and falling demand growth ...
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