Asian countries such as China, Japan, and India are pushing the global demand of oil higher than in 2012, as global demand increased by about 0.9% annually. In addition to these countries, Latin America's developing countries are also increasing their demand and to satisfy this increasing trend, OPEC remained the key supplier for the past years. Operations in the OPEC countries have remained the priority for large companies like Exxon Mobil (XOM) and BP (BP) as these countries have large proven oil reserves. Out of the total crude reserves, OPEC has 81%, and all non-OPEC countries have mere 19%, which shows OPEC's dominance over these regions.
Source: OPEC data
OPEC countries are currently looking to invest further to increase the capacity, and to maintain the operating costs.
Source: OPEC data
In this article, I have taken two companies that share the same region, face similar problems, and have compared how they've tackled their problems differently.
Ramping up new projects
- Production from Papua New Guinea to start
It seems that Exxon Mobil's LNG project in Papua New Guinea or PNG is set to deliver the fruits of its toils as it has completed construction of more than 90% and production will start in 2014. With a production capacity of around 6.9 million tons of LNG, this project will churn higher returns for the company; Exxon Mobil holds around 33% operating stake in the project. Close to 19,000 employees work in this project in which the company has invested approximately $19 Billion in the initial phase and this excludes administration expenses and shipping cost. After the declining natural gas price, Exxon Mobil focused significantly on liquids and LNG production, and I assume this project will satisfy the company's agenda to grow upstream revenues once again.
PNG LNG project will generate high revenue because the company has ready-buyers, which include big names like China Petroleum and Chemical Corporation (SNP), Osaka Gas (OSGSF.PK), Tokyo Electric Power Company (TKECF.PK), and Chinese Petroleum Corp. I assume that the company will get stable and strong financial long-term cash flow from this project, as LNG project has higher proven reserves. Moreover, the expected life of this project is about 30 years from 2014, in which time the company's annual production volume will increase by around 21 million barrels of oil equivalent at the peak production. Considering this promising project, I remain optimistic on the company's revenue generation in the upstream segment.
2. What's in Kazakhstan?
There were many delays in the oil production from Kazakhstan oil fields, but finally it will start from next month. There are many other giants like ConocoPhillips (COP), Total (TOT), and Shell (RDS.A) (RDS.B) also involved in this project. Kazakhstan oil project delayed by almost a decade and this has increased the budget by five folds. Due to heavy expenditure, it is expected that companies will take around 10-12 years to dig the profits from this oil field. Also, these companies need to produce around 400,000 barrels of oil per day and have to maintain this level in-order to see the positive cash flow from this project. This is one of the awaited projects, but due to internal disputes between the Kazakhstan government and companies, this project was delayed as a whole. Recently, by sheer accident, initial production has been halted for two weeks, but its commercial production is expected to start in the scheduled time. In my view, the better late than never approach will give the long-term benefits to the company like Exxon Mobil, and it will experience increasing oil production with the help of this Kazakhstan oil project.
Dispute in Iraq
Dispute between Iraq's central government and Kurdistan regional government continues over Kurdistan oil reserves. Exxon Mobil bagged a contract from KRG, or Kurdistan regional government, to explore six blocks in the disputed Kurdistan oil reserves area two years back. Since then, the Central government has banned the company, preventing it from bidding for any new oil field projects in the country. Moreover, the central government of Iraq has asked Exxon Mobil to give up its plans to explore Kurdistan oil reserve altogether. These unfavorable conditions of the Central Government, has resulted in the stake selling of the West Qurna-1 field in the South region of the country, which has estimated reserves of around 8 billion barrels. Exxon Mobil will be selling its stakes to the Chinese firm PetroChina (PTR) and the Indonesian company, Pertamina. I consider this stake selling a loss of opportunity for Exxon Mobil from a country with such a large oil reserve and a possible long-term cash cow. On the other hand, Exxon's major competitor, BP, will be able to grow more steadily in the region, thanks to its contract with the Iraqi Central government.
Stable Growth opportunity for BP in Iraq
BP's no bid for Kurdistan oil block is considered as one of the wisest decisions that company took in Iraq. The company honored its long-term agreement with the Central government of Iraq, and has signed a letter of intent to revitalize the disputed Kirkuk oil field in North Iraq. I think BP came an inch-close to getting a long-term contract in the region, where expected oil reserves stands at around 10 billion barrels. Kirkuk is one of the richest oil regions, but its oil production capacity has declined due to technical reasons. Central government's deal with BP is opposed by KRG, and one could smell that it's a clear indication over uncertain Iraq operations of the major oil multinationals.
After analyzing these situations, one can assume that BP is in better position than Exxon Mobil in Iraq and this may lead to better earnings from Iraq. However, fortune of both the companies lies in the hands of the government, and can have a twist in the tail at any given point of time.
Valuation ratios of Exxon Mobil looks attractive, as it has PE of around 5.29, which is significantly lower than 12.01 PE of whole sector. In addition, it has 75% lower price to sales in-comparison to the sectoral price to sales of around 1.41. A lower price to book ratio of Exxon Mobil gives me an impression that the stock can move upside from the current stock price levels. All these valuation metrics looks good and in-favor of the company. Exxon Mobil has better margins, expected EPS growth, which will be able to sustain the profitability in the long run as the company is standing on a strong foundation.
Exxon Mobil operates on strong profitability ratios, as it has higher gross margins, and it has higher profit margin in comparison to its peers BP and Total SA. Contradictory, its dividend yield remained the concern for investors looking for dividends. After considering this profitability ratio, I feel the company's margin will manage to sustain its growth in the long run with increasing production.
After considering the above factors, I think Exxon Mobil's increasing production from the Papua New Guinea and Kazakhstan will give lease of life to the company. However, it's uncertain future in Iraq may partially offset its gains in other regions. In the meantime, BP is enjoying its profitable position in Iraq and this will result in higher production for the company in the future. Although Exxon Mobil's promising project will give long-term benefits, I will remain conscious on my approach and advice investors not to initiate any long position at this level and hold this stock. If there are, any further declines in the stock, investors should accumulate stock at around $82 to gain long-term gain.