Energy behemoth Exxon Mobil (XOM) has recently added an additional 1.8 billion barrels of oil equivalents (BOE) to its proven oil and gas reserves in 2012, of which 1.4 billion were crude and other liquids. This takes Exxon's total proven reserves to 25.2 billion boe at the end of 2012, increasing from 24.9 billion boe at the end of 2011. It has been strategically moving away from gas towards liquids, after purchasing a number of quality assets at low valuations. In 2011, its total reserves comprised of 51% natural gas and 49% liquids; by 2012, this changed to 49% natural gas and 51% liquids. The 2012 liquid additions represent a 174% reserve replacement ratio (RRR) for crude and other liquids in 2012 and just 56% for natural gas. Over a decade, however, crude and other liquids' replacement ratio has been 102% while Exxon loaded up on natural gas reserves 45% faster than it consumed them.
The prices of both gas and crude fell sharply in 2008-09 but while crude has regained most of its lost value, natural gas is still hovering around $100 - $150 per thousand cubic meters, down from its $456 peak in June 2008. This spread between oversupplied WTI crude and oversupplied Natural Gas in the U.S. will likely remain high until political headway is made on either LNG export licenses, improved pipeline infrastructure and/or refinery growth.
According to the Natural Gas Supply Association, Exxon Mobil is the largest supplier of natural gas in the U.S, ahead of Chesapeake (CHK) and Anadarko Petroleum. Along with Exxon, Chesapeake would like to increase its exposure to oil versus gas. In 2011, natural gas accounted for 82% of its earnings. By 2012 natural gas accounted for 77% and that is against effectively higher prices. But that is likely as much the effect of Chesapeake's revenue structure being dominated by long-term supply contracts at 2011 prices as it was an overall shift in production ratios. That said, current oil production rose 69% in Q4-2012 year-over-year. In 2013 gas' contribution to the bottom line is expected to fall further.
Exxon released its quarterly results on February 1st in which earnings increased by 5.8% to $9.95 billion due to strong refinery performance despite a 19.4% fall in international upstream operations (see chart for revenue breakdown by segment below). Its downstream earnings surged 316% to $1.768 billion with significant increases coming from both the U.S and abroad.
But the drop in Upstream performance aboard is the result of Exxon pulling back from more risky overseas operations and focusing more on diversifying its income streams. In a year it has shifted its revenue structure significantly, going from earning 90% of its revenue from drilling to 74%. Where refining accounted for just 4.3% of sales in 2011, it now accounts for nearly 17%. With domestic supply of oil and gas suppressed versus the global market it is no wonder that Exxon's biggest gains came from downstream and chemical production.
However, this shift has cost them in the short term and, as a result, despite solid performance, income increased by less than 6%. And unlike its rival, Chevron (NYSE: CVX) which posted a 41% increase in income, it didn't do so by selling assets -- $1.4 billion of its gains in asset swaps and higher refining margins.
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The continued wide spread between WTI and Brent crude, currently holding $18-22 per barrel is a major boon to U.S. refiners and is part of the reason why we can even talk about a recovery in the U.S. economy. But until there is better internal distribution of the produced oil and refined products, the U.S. economy is still at the mercy of higher Brent pricing.
And this shift is reflected in Exxon's bottom line perfectly. Revenue slipped by 5% to $115.17 billion as its total output (both oil and gas) dropped 5.2% to 4.29 million barrels of oil equivalents per day. But net income rose 9% to $44.88 billion. Higher refining margins went directly to the bottom line. Add in Exxon spending $5 billion on share buybacks per quarter and there is a solid bid under the stock's price. Near record income, rising reserves and expanding margins bode well for 2013. I've liked Exxon for a few months and I still like the story. The infrastructure mismatch in the U.S. will improve over time and the company has a fantastic track record of managing its reserves without volatility.