Lackluster Growth Prospects Dampen Exxon's Short-Term Outlook

| About: Exxon Mobil (XOM)

Exxon Mobil (NYSE:XOM) has asked Iraq's prime minister if it can keep running a huge southern oilfield in spite of disagreements over rival contracts signed with the country's autonomous Kurdistan region. The talks between Prime Minister Nuri al-Maliki and Exxon's top executive in Baghdad come as the company has offered to sell its stake in the West Qurna-1 oilfield in the south after problems with Baghdad over its deals with the autonomous Kurdish enclave in the north. Iraq has been clear that it considers the deals oil companies like Exxon make with the Kurdish enclave illegal. The prime minister is reported to have told Exxon that it cannot operate both deals simultaneously and that it should observe the laws of Iraq. Iraqi officials had said late last year that China National Petroleum, or CNPC, is the favorite in negotiations to take over Exxon's 60% stake in the $50 billion West Qurna-1 project.

Iraq's Arab-led central government and Kurdistan Regional Government run by ethnic Kurds are disputing control of oil revenues, oilfields and territory. Iraq's government says it has the constitutional authority to export crude oil and sign deals, but Kurdistan says the constitution allows it to agree to contracts and ship oil independently of Baghdad.

Kurdistan, an autonomous region, is sitting on a huge quantity of oil and would naturally like to sell it. But, the newly-established Iraqi central government also wants that oil money, and has laid claims to the resource. As a result, tension is high. Iraq's central government has barred oil and gas companies operating within the country to sign independent deals with the Kurds. Exxon Mobil has a 60% interest in a massive Iraqi oil field at West Qurna-1, worth about $50 billion and shares the project with other super majors like Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.A).

Exxon floated its stake in the West Qurna 1 project, and so far China National Petroleum is reportedly the favorite in negotiations, but Exxon is obviously trying to find a way to honor both contracts. Iraq has the fourth-largest reserves of oil in the world.

Exploring in Canada

The Hebron oil field, off the coast of Newfoundland, is thought to contain up to one billion barrels of oil, and Exxon Mobil is spending $14 billion to drill one of the biggest oil fields in the North Atlantic. Exxon's plans for Canada are attracting calls for the United States to do the same off its Atlantic Coast, which has been closed for oil and gas exploration use. However, critics have said that letting Exxon drill off the coast of Newfoundland or the heavily populated U.S. Eastern Seaboard could be a mistake because drilling in gold and remote regions remains highly dangerous. In 1982, the Ocean Ranger, which was then the largest drill rig of its type in the world capsized and sank in nearby waters during a winter storm and all 84 crew members died. To tap this new oil field, Exxon and its partners are constructing a massive platform that will sit on the ocean floor and rise more than 300 feet to the surface, then an additional 300 feet above the water.

Foreign competition

For Exxon, that doesn't merely mean competitors such as Royal Dutch Shell and BP (NYSE:BP), but also entire nations. Foreign government owned oil companies have had a substantial impact on the industry and Exxon in particular. 50 years ago, the company was producing nearly 15% of oil used by non-communist countries. But a wave of oil company nationalizations in countries such as Venezuela, Saudi Arabia, Libya, and Iran drove Exxon's production and down to 3% of the world's oil supply. The emergence of state-owned oil and gas companies continues, and China, Brazil, Malaysia, South Korea, and others have joined the ranks of national oil companies. In fact, China's state-owned oil companies -- CNOOC (NYSE:CEO), PetroChina (NYSE:PTR), and Sinopec (NYSE:SHI) -- have invested more than $200 billion over the past few years in joint ventures and foreign assets. By contrast, Exxon plans to spend $37 billion every year through 2016 and has discovered the political risk of overseas investment the hard way in Iraq.

What to expect in the fourth quarter

Exxon has been stable and not particularly volatile in the past few years. A much higher share of its revenues are derived from refining rather than from exploration, and tighter margins in late 2012 will reflect in the bottom line. Exxon has also struggled to keep pace with its upstream operations, with crude oil production 6% lower in the third quarter on a year-on-year basis. The market will be looking to learn the latest on the Hebron oil field in which Exxon and Chevron are the two largest partners with 36 and 27% respectively. The project seeks to capture a total of 700 million barrels of heavy crude starting in 2017 at a peak rate of 150,000 per day. Analysts expect total revenues of $117 billion for the quarter, compared to $115.7 billion in the third quarter of 2012. Earnings are expected to hit $2 per share for the quarter, compared to $2.09 per share for the preceding quarter.

Exxon is a giant and financially sound company, but production growth has been negative in the third quarter of 2012, and this is not expected to improve significantly in 2013. Because of its lackluster growth prospects, and political instability of its growth areas, I suggest holding at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.