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Exxon Mobil Corporation (NYSE:XOM)

Q4 2009 Earnings Call

February 1, 2010 11:00 am ET

Executives

David S. Rosenthal – Vice President, Investor Relations and Secretary

Analysts

Paul Sankey - Deutsche Bank

Doug Terreson - ISI Group

Neil McMahon - Sanford Bernstein

Robert Kessler - Simmons & Company International

Paul Cheng - Barclays Capital

Faisel Khan - Citi

Doug Leggate - BofA Merrill Lynch

Jason Gammel - Macquarie Research Equities

Mark Gilman - The Benchmark Company

Operator

Good day and welcome to the Exxon Mobil Corporation fourth quarter 2009 earnings conference call. Today’s call is being recorded. At this time for opening remarks I’d like to turn the call over to the Vice President of Investor Relations and Secretary, Mr. David Rosenthal. Please go ahead, sir.

David S. Rosenthal

Good morning and welcome to Exxon Mobil’s teleconference and webcast on our fourth quarter and full year 2009 financial and operating results. As you are aware from this morning’s press release, Exxon Mobil’s fourth quarter earnings performance was strong. Our results reflect the soundness of our business model during a period of global economic weakness and significant volatility in commodity prices.

Before we go further, I would like to draw your attention to our cautionary statement. Please note that estimates, plans and expectations are forward-looking statements. Actual results, including resource recovery, volume growth and project outcomes could differ materially due to factors I discuss and factors noted in our SEC filings. Please see Factors Affecting Future Results and the Form 8-K we furnished this morning, which are available through the Investors Section of our website. Please also see the frequently used terms, the supplements to this morning’s press release and the 2008 financial and operating review on our website. This material defines key terms I will use today, shows Exxon Mobil’s net interest in specific projects and includes our SEC Regulation G disclosure.

Now I am pleased to turn your attention to the fourth quarter results. Exxon Mobil’s fourth quarter 2009 earnings were $6.1 billion, a reduction of $1.8 billion from the fourth quarter of 2008, mainly reflecting the challenging environment in the downstream. Compared to the third quarter of 2009, earnings were up $1.3 billion. Earnings per share were $1.27, down $0.27 from a year ago. During the fourth quarter of 2009, Exxon Mobil distributed a total of $4 billion to shareholders, including dividends of $2 billion and share purchases to reduce shares outstanding of $2 billion.

Exxon Mobil’s full year 2009 earnings were $19.3 billion, down $25.9 billion from 2008, reflecting the weak economy, resulting in lower commodity prices, weaker margins and lower demand. Full year 2009 earnings included a charge of $140 million for interest related to the Valdez litigation. Full year 2008 earnings included a gain of $1.6 billion on the sale of our German gas transportation business and a charge of $460 million related to the Valdez litigation. Earnings, excluding special items, were $19.4 billion, down $24.6 billion from 2008.

As you are aware, on December 14, 2009, Exxon Mobil and XTO Energy announced an agreement, bringing together two organizations with highly complementary skills and capabilities. XTO has assembled a substantial, high quality, unconventional natural gas and oil resource base in the U.S. They also have extensive technical capabilities and operating experience in unconventional resources. These qualities, combined with Exxon Mobil’s global, unconventional gas portfolio, world class research and technology capabilities, industry leading project management and operational skills, and financial capacity will create a premier, global, unconventional resource organization. We expect to file the joint S-4 registration statement and proxy statement with the Securities and Exchange Commission shortly. Additionally, we anticipate submitting the Hart-Scott-Rodino Act filing to the Federal Trade Commission by mid-February.

Turning now to our business line results and some of the milestones we achieved since the last earning call, first in the Upstream. During the quarter, the second phase of the Al Khaleej Gas project started up in Qatar. AKG Phase 2 has the capacity to supply 1.25 billion cubic feet of gas per day to meet Qatar’s growing domestic demand. Combined with Phase One, which has been operating since 2005, AKG Phase 2 has increased the project’s total gas supply capacity to 2 billion cubic feet of natural gas per day. Including AKG Phase 2, Qatar Gas 2, Trains 4 and 5 and Ras Gas Train 6 in Qatar, the South Hook LNG receiving terminal in the UK, the Adriatic LNG terminal in Italy, Piceance Phase 1 in the U.S. and Spherion’s in Norway, Exxon Mobil completed eight major project start-ups in 2009. These projects are forecast to provide a combined net production of nearly 400,000 oil equivalent barrels per day in 2010.

The final Qatar LNG Train, Ras Gas Train 7, is completing commissioning. Gas is now flowing into the facility and we anticipate first LNG in the coming weeks. This will be the fourth 7.8 million tons per year train brought online by our joint ventures with Qatar Petroleum. Including this train, we will participate in approximately 62 million tons per year of LNG capacity in Qatar.

In December, Exxon Mobil and our co-venture partners agreed to proceed with the Papua New Guinea LNG project. The project is an integrated development that includes gas production and processing facilities, onshore and offshore pipelines and liquefaction facilities with the capacity to produce 6.6 million tons of LNG per year. To date the project participants have executed sales and purchase agreements for 5.3 million tons per year of LNG with Sinopec, Tokyo Electric Power Company and Osaka Gas Company. The remaining sales and financing activities are well progressed and the project remains on track to complete these agreements in the first quarter of 2010. Major contracts associated with the development of the project have been awarded and project execution activity has commenced.

In Russia, we completed the first two extended-reach wells at our Sakhalin 1, Odoptu Project, using one of the world’s most powerful land based rigs. In addition, the Sakhalin 1 Project’s De-Kastri Oil Export Terminal received the Terminal of the Year Award at an annual industry conference hosted in Russia. The aware recognizes the most outstanding international terminal with a capacity of over 5 million tons annually.

Also during the quarter, Exxon Mobil drilled the longest well in North America at our Santa Ynez unit offshore California. This complex well measured over 37,000 feet in total length and set a new world record for horizontal reach for an offshore well.

In December, Exxon Mobil resumed drilling our two development wells at Point Thomson in Alaska. We expect to complete these wells later this year.

Moving to Exploration, we completed a new wildcat well targeting additional potential near our deepwater Hadrian discovery in the Gulf of Mexico. The well encountered oil and gas in several sub-salt reservoirs. Operations continue on a successful sidetrack, drilled into an adjacent fault block.

In the Asia Pacific region, the West Aquarius rig completed the [Dhabi Quan] One well offshore of the Philippines, our first wildcat in the SC 56 block. The well encountered gas and multiple reservoirs. We are evaluating this discovery and have now commenced operations on a second wildcat well on the block. We also participated in three natural gas discoveries on Australia’s Northwest Shelf.

During the fourth quarter we worked with the Iraq Ministry of Oil to finalize the agreement to redevelop and expand the West Qurna-1 field. Last week we signed this agreement and we look forward to working with the government of Iraq and the South Oil Company in progressing this significant new opportunity.

Turning to our unconventional gas opportunities, during 2009 Exxon Mobil increased its position in the Marcellus Shale gas play through a formation of a 50-50 joint venture with Pennsylvania General Energy. The joint venture holds approximately 290,000 gross acres in the play and we are encouraged by the drilling results and production rates achieved so far. Including this capture, our total global, unconventional gas acreage now stands at over 5.5 million net acres.

In the Horn River Basin in Canada, we ramped up our activity during the fourth quarter. We currently have four rigs, conducting an extensive evaluation program of our industry leading acreage position in this shale gas play. We plan to conduct a number of well tests over the next few months.

Also in Canada, Exxon Mobil acquired 16.5 thousand net acres of high quality, oil sands resource in the Firebag area of Athabasca. This new acreage is adjacent to several of our existing leases and is close to the coral development area.

Turning now to the Upstream operating results, Upstream earnings in the fourth quarter were $5.8 billion, up $150 million from the fourth quarter of 2008. Upstream, after tax earnings per barrel, were $15 in the fourth quarter of 2009. Higher crude oil prices, partly offset by lower natural gas realizations in all regions, increased earnings by $660 million. Worldwide liquids realizations were up over $21 per barrel in the quarter, while natural gas realizations were down $3.46 per kcf from the fourth quarter of 2008. Higher volumes increased earnings by $250 million. Other effects reduced earnings by $760 million, due primarily to lower gains from asset sales and increased exploration expense.

Fourth quarter 2009 oil equivalent volumes increased about 2% from the fourth quarter of last year, driven by major project ramp ups. Entitlement volume effects including price and spend impacts, NPSC interest reductions, reduced volumes by 26,000 barrels per day. Excluding the impact of lower entitlement volumes, quotas and divestments, production was up over 3%. Project ramp ups in Qatar, [inaudible] and the U.S. more than offset natural field declines. Liquids production decreased 79,000 barrels per day or 3% from the fourth quarter of last year. Excluding impacts related to lower entitlement volumes, quotas and divestments, production was essentially flat.

Project ramp ups in Qatar, Kazakhstan and the U.S. offset natural field decline. Gas volumes increased 868 million cubic feet per day or nearly 9% from the fourth quarter of 2008, driven by new project volumes in Qatar, partially offset by natural field decline.

Turning now to the sequential comparison, versus the third quarter of 2009, Upstream earnings increased $1.8 billion due primarily to higher realizations and increased volumes. Liquids and natural gas realizations increased earnings by $840 million. Higher crude oil and natural gas volumes increased earnings by $550 million. Other items benefited earnings by an additional $380 million.

Liquids production increased 2.5%, mainly reflecting the impact of new project volumes. Natural gas production was up over 31%, driven by seasonally higher demand in Europe and new project volumes in Qatar. In total, oil equivalent volumes were up almost 13% from the third quarter.

Looking now at the full year results, 2009 Upstream earnings excluding special items were $17.1 billion, down $16.7 billion from 2008. Lower realizations decreased earnings by $15.2 billion. Crude oil prices were down over $34 per barrel and natural gas realizations decreased $3.53 per kcf, reflecting lower prices in all major producing regions. Volume mix effects increased earnings by $700 million. Other factors reduced factors by $2.2 billion, largely due to higher expenses, including the impact of new project start ups and increased exploration activities and lower gains on asset sales.

Full year equivalent volumes were up slightly from 2008. Liquids volumes were down less than 1%, while natural gas volumes were up 2%. Excluding entitlement volume effects, quotas and divestments, total production was up 1.6%. New project volumes in Qatar, the U.S., West Africa and Kazakhstan more than offset natural field decline.

Moving now to the Downstream, the Fujian Integrated Refining and Chemical Complex achieved full operation during the fourth quarter. This joint venture project is the first integrated refining and petrochemical facility in China with foreign participation. More than $4.5 billion was invested in the complex, which tripled the distillation capacity of the existing refinery. The Complex also features a state-of-the-art cogeneration facility, which will meet the majority of the site’s power demands. The integration of refining, chemical and fuels marketing operations provides synergies that will help maximize operating flexibility and capture associated cost savings.

In our Lubricants business, Exxon Mobil and Toyota Racing Development announced a new technological partnership in which Exxon Mobil will provide Mobil One racing oil technology and products to Toyota racing supported NASCAR teams starting in the 2010 season. We also received the Thomas A. Edison Patent Award for development of Mobil One Emission Systems Protection Oil, further demonstrating our lubricant technology leadership. Mobil One ESP was specially formulated to enable reduced emissions from diesel passenger cars.

Finally, in refining we continued our activities to optimize refinery operations by expanding our crude flexibility. This quarter Exxon Mobil ran 21 crudes that were new to individual refineries.

Turning now to the Downstream operating results, Downstream earnings in the fourth quarter were a loss of $189 million, down $2.6 billion from the fourth quarter of 2008. Lower margins decreased earnings by $2.2 billion, driven mainly by significantly weaker industry refining and marketing margins. Volume and mix effects increased earnings by $140 million. Other effects decreased earnings by $510 million, mainly reflecting lower gains on asset sales.

Sequentially, fourth quarter Downstream earnings decreased by $514 million. Margin effects reduced earnings by $650 million, reflecting lower industry refining and marketing margins. Volume and mix effects increased earnings by $190 million, including favorable refining optimization impacts. Other factors decreased earnings by $50 million.

Full year 2009 Downstream earnings were $1.8 billion, down $6.4 billion from 2008. Lower margins reduced earnings by $5.1 billion, primarily due to weaker industry refining margins. Volume and mix effects decreased earnings by $310 million, reflecting lower demand. Other factors reduced earnings by $990 million, mainly reflecting lower gains from asset sales.

Turning now to our Chemical business, during the quarter Exxon Mobil announced completion and start up of an expansion at our Rotterdam Aromatics Plant, located in The Netherlands. The expansion was completed on schedule and has made this world scale plant our largest Paris Island production facility. The new unit employs Exxon Mobil’s proprietary technology to improve selectivity, generate less waste and reduce energy requirements.

In November, Exxon Mobil Chemicals affiliate, TonenGeneral and Toray Industries, announced an agreement to establish a joint venture to develop, manufacture and sell lithium ion battery separator film. The joint venture will build on Exxon Mobil’s more than 20 years of experience and success in providing separator films, as well as support the development of next generation films for the lithium ion battery market.

And finally, Exxon Mobil Chemical and Qatar Petroleum announced an agreement to progress the joint development of a world scale petrochemical complex in Ras Laffan Industrial City, Qatar. The proposed complex would include the world’s largest steam cracker and polyethylene plants and one of the world’s largest ethylene glycol plants. The project will employ Exxon Mobil’s proprietary processes and product technologies and will utilize feedstocks from gas development projects in Qatar’s North Field to produce a range of premium products.

Turning now to Chemical operating results, fourth quarter Chemical earnings were $716 million, up $560 million from the fourth quarter of 2008. Stronger margins improved earnings by $190 million, reflecting higher realizations. Higher volumes also increased earnings by $190 million. Other effects improved earnings by $180 million, mainly due to lower hurricane related costs. Sequentially, fourth quarter Chemical earnings decreased by $160 million. Lower margins decreased earnings by $200 million. Positive volume and mix effects increased earnings by $80 million, mainly due to higher commodity volumes. Other effects were a negative $40 million.

Full year 2009 Chemical earnings were $2.3 billion, down $650 million from 2008. Weaker margins reduced earnings by $340 million. Lower volumes decreased earnings by $190 million, reflecting the impact of the economic slowdown. Other effects were a negative $120 million.

Turning now to our Corporate and Financing segment, Corporate and Financing expenses during the quarter were $257 million versus $383 million in the fourth quarter last year. The decrease reflects favorable tax effects. For the full year 2009, expenses excluding special items were $1.8 billion compared to $830 million in 2008, mainly reflecting lower interest income. The effective tax rate for the fourth quarter was 45% and for the full year 2009, the effective tax rate was 47%. At the end of the fourth quarter, our cash balance was $10.7 billion and debt was $9.5 billion.

The corporation distributed $4 billion to shareholders in the fourth quarter through dividends and share purchases to reduce shares outstanding. Of that total, $2 billion was distributed to purchase shares in excess of dilution. For the full year 2009, we distributed a total of $26 billion to shareholders, including $18 billion to purchase shares in excess of dilution, which reduced shares outstanding by 5%, further demonstrating our commitment to return cash to our shareholders.

In the first quarter of 2010, share purchases to reduce shares outstanding are expected to continue at a pace consistent with fourth quarter 2009 of $2 billion. However, total purchases for the quarter may be less due to trading restrictions following the filing of XTO Energy’s merger proxy.

CapEx in the fourth quarter was $8.3 billion, an increase of 21% from fourth quarter 2008. Full year 2009 CapEx was a record $27.1 billion, nearly $1 billion higher than 2008. In spite of the global economic downturn, we continue to invest at record levels in advantaged projects to help meet global demand for crude oil, natural gas and finished products.

Operating expense for the full year 2009 was down 8% or about $6 billion from full year 2008. While energy and foreign exchange impacts were a big part of the reduction, we achieved over $1 billion in efficiencies and an additional $1 billion in savings related to our ongoing asset divestment program. These expense reductions were partly offset by new, Upstream project start ups, higher activity levels including exploration, and increased pension expense. This performance reflects our ongoing very active cost management efforts.

In summary, these results reflect the soundness of Exxon Mobil’s business model. Our ability to succeed, even during the volatile business conditions in 2009, demonstrates that our long term commitment to the integrity of our operations, disciplined investment approach and integrated business model continue to deliver superior results.

Finally, I would like to mention two upcoming events. First in mid-February we will be releasing our 2009 Reserves Performance Data. Second, as many of you will already have seen, our Analysts Meeting this year will take place on Thursday, March 11. This will include a live audio webcast beginning at 9:00 AM Eastern, 8:00 AM Central Time. Exxon Mobil’s presenters will be led by Chairman and CEO, Rex Tillerson.

Before I take your questions, and as you can appreciate, I will not have any further comment at this time related to the Exxon Mobil and XTO Energy agreement. I would now be happy to take your question.

Question-and-Answer Session

Operator

Thank you, Mr. Rosenthal. (Operator Instructions) Your first question comes from Paul Sankey - Deutsche Bank.

Paul Sankey - Deutsche Bank

I was just going to clarify a previous comment you’ve made on the Exxon, XTO deal which is that the guidance was for completion in Q2 of this year. I assume that given the comments you made about the filings that there’s every reason to believe that’s still an achievable target.

David S. Rosenthal

Yes, I would expect that’s an achievable target.

Paul Sankey - Deutsche Bank

If you could just quickly on the volume side, you mentioned that you had a record number of start ups I believe, 400,000 barrels a day of 2009 start ups for 2010 volumes at 400,000 barrels a day. What was the exit rate, David, on those projects as we left 2009 to give me an idea of how much incremental volume you’ll be looking at in 2010?

David S. Rosenthal

Sure, Paul. The exit rate was about 100,000 barrels a day and as we look at the full year 2010 we would expect to get another 300,000 barrels a day. So we ended the fourth quarter on a very strong momentum coming into 2010 and all of those projects that I mentioned are up and running and performing very well.

Paul Sankey - Deutsche Bank

If I could just reach around in a couple of the volumes I believe although you mentioned Sakhalin, some technical achievements at Sakhalin, I believe that there’s been some decline issues there. I wonder if you could help me just by stripping out the Russian Caspian performance a little bit, both in the oil and gas side from what you’ve released?

David S. Rosenthal

Yes, I think we’ve seen some normal decline in Sakhalin, but Paul I’ll tell you there’s nothing over there that’s unexpected or out of the ordinary as we finished up the year and heading into this year. But really I’d just tell you it’s in line with our expectations.

Paul Sankey - Deutsche Bank

But would it be fair to say that Russia for example Russian oil production was down, but you’ve got overall Russia Caspian volumes up quite strongly?

David S. Rosenthal

Oh, sure. Yes. Russia was down but we did get a nice uptick at [Tanges] in Russia with the expansion start up there.

Paul Sankey - Deutsche Bank

And the gas on the Russia Caspian side, could you talk a bit about that?

David S. Rosenthal

On the gas side I think what we’ve seen there, I don’t think we’ve seen anything substantial there.

Paul Sankey - Deutsche Bank

Again on volumes I’m imagining that the cold weather in Europe is going to be a big driver for you. I don’t know the extent to which it was an impact in Q4, but any further comment you can make about how weather will be impacting your European volumes would be great.

David S. Rosenthal

Sure. As you noted, the weather in the fourth quarter did drive our European demand a fair amount in the fourth quarter. In particular if we look sequentially relative to the third quarter, it was a fairly sizable increase there. So what you really saw in the fourth quarter on those gas volumes, ramp up in Qatar and those projects continue to ramp up and then of course a nice uptick in European gas volumes. So if you look at our European gas volumes, those are going to be driven by the cold weather.

Operator

Your next question comes from Doug Terreson - ISI Group.

Doug Terreson - ISI Group

In refining and marketing, isn’t it true conditions have been challenging for everybody and I think you guys have posted losses three quarters in a row which I think is the first such situation in at least a decade or maybe more. And so on this point I wanted to see whether there was some specific industry trends that have proven surprising to Exxon in recent quarters and if so, what were they? And number two, are there any new strategies or tactics that you guys are employing or thinking about which might allow the company to arrest this trend?

David S. Rosenthal

Well as you mentioned, Doug, the industry trends over the full year 2009 really reflect just a challenging environment overall. We’ve seen lower demand, lower to margins, product inventories have been at high levels. But as we’ve looked across the year and looked at what we can do to maintain our competitive position, I would focus on a couple of things that we can control that we work real hard. Of course operational excellence and safety in our refineries; taking advantage of our integration, particularly if you’re looking relative to standalone refiners; as you know most of our large refining sites are fully integrated with [inaudible] and the lubes business. So we’re seeing a nice advantage to integration and of course that gets back to the whole issue of molecule management and the ability to really optimize around the complete site so that we can take advantage of feed slates coming in and then optimize our products on the outward side, so that we’re optimizing both the refining side of the business as well as chemicals.

So certainly a tough year, tough for everybody, we feel though some of our competitive strengths have helped us a bit in what has been a very tough environment. In terms of new strategies going forward, we are aware that some of our competitors have recently announced restructurings in their Downstream business. I think from our perspective though we’ve always been very efficient in our operations and again taking advantage of the competitive strengths that we’ve had. But I’d also like to note that we have been making changes to our portfolio literally over the last several years, on an ongoing basis. I might just mention a couple. If we look back over the last many years we have divested interests in about ten refineries, including Ingolstadt in 2007 and Okinawa in 2008 at a period when the environment was literally the opposite of what we see today. We’ve also divested about 5,000 miles of pipeline assets, 145 product terminals, several lube plants and 18,000 retail stations. So that effort is ongoing.

We’re very pleased with what we’ve done and as always we’re open to discussion. But we don’t see a need right now for any significant restructurings at this time, but we’ll see how things go. But we’re in pretty good shape right now.

Doug Terreson - ISI Group

In Iraq you mentioned a few minutes ago about the West Qurna agreement that you guys talked about last week and on this project, you know, maybe it’s preliminary but maybe it’s not, I just wanted to see if you could provide any additional insight as to how you envision the investment and output profile unfolding in coming years.

David S. Rosenthal

If you look at Iraq, first of all I’d like to say that we are very pleased to have reached this agreement on what is a very significant new opportunity for us and we have commenced development planning. But as we really just commenced the planning and are looking at this, really not in a position to give a lot of details in terms of timing but the agreement does call for us to raise plateau production by about 2 million barrels a day. But we’re just getting after that and we’re very excited.

Operator

Your next question comes from Neil McMahon - Sanford Bernstein.

Neil McMahon - Sanford Bernstein

I’ve got a few questions. The first is really an update on the fracing testimony that you undertook on January 20. Really any fallout or feedback from that and any update would be great. And secondly any further news on Kosmos assets in Ghana and where you stand there.

David S. Rosenthal

Thanks, Neil. Yes, on fracing we did have a very successful meeting recently. There hasn’t been any as you term fallout from that necessarily. I think it’s good that we’re having the opportunity to educate everybody on hydraulic fracing and the very importance of these new shale gas plays to meeting the U.S.’s energy needs for decades to come. As I’m sure you’re well aware, there’s been over 1 million wells fraced over the last many, many years and there’s really been no documented case of any issues. And the industry has a lot of processes and procedures and technologies in place to insure that that doesn’t happen. And further I’ll just say that careful studies by the EPA and the Groundwater Protection Council have not recorded any incidence of groundwater contamination attributable to hydraulic fracing so we continue to press on. The industry continues to press on and we look forward to opportunities to dialog again about this very important resource development opportunity that we have in the U.S.

In terms of your second question, I really don’t have any news or any further comments to make.

Neil McMahon - Sanford Bernstein

Really just expanding on the Philippines exploration program and maybe just if you could outline the further exploration program for the tier. And by the way, congratulations on your Terminal of the Year Award. I wasn’t aware that there was one.

David S. Rosenthal

Thank you. Let’s talk about the Philippines. We did successfully drill our first well, the [Dhabu Quan] One well and that prospect has found gas in several areas. We are now on our second well in the area and are very pleased with the preliminary results. It is preliminary. It’s a new play concept but to date we’re feeling pretty good about how things are going.

Operator

Your next question comes from Robert Kessler - Simmons & Company International.

Robert Kessler - Simmons & Company International

One quick clarification on the numbers and then a more of a strategic one. On the numbers looking at your Upstream variance sequentially 3Q versus 4Q, you’ve got a positive $380 million there. Wondering if you might be able to further clarify the components adding to that.

David S. Rosenthal

Sure. I’ll tell you first off it’s a lot of items, none of which individually are significant. We did see some favorable tax effects but we also had some positive foreign exchange in there and actually some lower operating expense excluding the higher exploration activity. So just a number of factors. All were positive sequentially but nothing noteworthy on an individual basis.

Robert Kessler - Simmons & Company International

On a more strategic front, I hope this question won’t be rejected by your XTO no comment one, but with respect to your global kind of shale strategy you’ve obviously added a lot in recent years and will be adding quite a bit more with the XTO deal on the shale gas side, but that sort of begs a question. With your crude oil volumes declining globally year on year and your natural gas production already growing year on year before the transaction and with crude oil at a substantial premium to gas what about the oil shale side? Things like the [Balkan]. Might you get more aggressive in those opportunities in the Exxon Mobil portfolio?

David S. Rosenthal

First of all, I will have to say I don’t have any comment on the XTO Energy transaction but nonetheless let me step back and talk about our global unconventional position. It’s not a strategic shift. We are not shifting away from oil to gas. We have a number of projects underway to in fact increase oil production, most notably our Kearl Project which I’ll just mention here is ramping up quickly and things are going very well there. And as you know, Phase 1 of that is expected to deliver over 100,000 barrels a day. So it’s not a strategic shift. It is a tremendous opportunity for us. We have been acquiring these unconventional resources at a very low entry cost with a very long holding period. We’re pleased that we’ve seen both a geographic diversity across the U.S., at Marcellus I mentioned, Horn River in Canada, Germany, Eastern Europe, we’ve got shale gas, tight gas, coalbed methane acreage. So the portfolio is growing nicely and again our key strategy is to acquire attractive resources that we can develop and monetize to create shareholder value.

The Balkan in particular, we’ll see how things go but again we are very pleased with this portfolio we’ve amassed and have very robust plans underway to assess and develop and exploit those resources.

Operator

Your next question comes from Paul Cheng - Barclays Capital.

Paul Cheng - Barclays Capital

Just wanted to clarify, first I think earlier you had said your exit of 100,000 [boe] per day and expect an additional 300,000 barrels per day of the production. You said natural exit on all this. Are you talking about the gross and is it just on Qatar or are you talking about your all four growth projects?

David S. Rosenthal

Yes, let me clarify that. Those numbers the 100 plus the 300 equals 400 were net barrels and those were all start ups in 2009. And then of course as we move into 2010, we’ll be bringing on line the fourth Qatar Train which is we’ve got gas flow into it and we would expect first LNG in the coming weeks. But you know one thing I will say, Paul, we’ll be giving you and everybody the full update and story on our production volume outlook for 2010, how the projects are coming along, what that ramp up’s going to look like. And we look forward to giving you that full story here in just about a month.

Paul Cheng - Barclays Capital

When you say 100,000 barrel per day for the quarter, I assume you’re talking about your entire company portfolio and not just in Qatar, right?

David S. Rosenthal

Yes. That’s the entire portfolio but of course you know that’s out of all our projects for the year. Of course a big piece of that is of course the Qatar project.

Paul Cheng - Barclays Capital

On a related subject on Qatar, can you share with us how much is the LNG gas that had previously [inaudible] or that’s supposed to shift to U.S. and now you may be looking for other charge and selling it into the high end net effect outside market like in Asia and Europe?

David S. Rosenthal

Paul, without getting into any specific figures or numbers, I would just say that as you know across the Qatar projects we’ve got a portfolio of sales, some of which are fixed and are turned up. But then a number of them are available, have the flexibility to be diverted to whichever market we can get the best realization and value for. And as you would expect, we are actively pursuing those options, literally on a daily basis. But I really couldn’t give you any specific volumes or percentages.

Paul Cheng - Barclays Capital

The Qatar new Train that is actually tailored specifically for the U.S. market, if that assumption is correct or that is actually two Train [warnings]?

David S. Rosenthal

I wouldn’t say that anything is particularly tailored to any one particular market. Our strategy is to be flexible. We did start up South Hook in the Adriatic this past year. We would expect to see the Golden Pass LNG terminal come on in the second half of this year and be ready to receive LNG. But we’re also taking advantage when we have opportunities even to sell spot cargoes into the Asia Pacific area. So wherever we can get the best net back, wherever the demand is, that’s where our cargoes are going.

Paul Cheng - Barclays Capital

One, on Iraq, based on the current contract terms I presume you will not be allowed to book any reserve under the SEC definition. I just want to clarify on that. And secondly then, if you will be able to share with us what is the price finalization impact or any given to gain or loss in the quarter?

David S. Rosenthal

Sure. Let me hit those. They’re two separate questions, Paul. When we look at the contract in Iraq and we look at SEC rules, right now we don’t see any reason at this time why we would not book reserves. So again consistent with the guidelines in the contract right now, we think we will be able to book reserves.

If we look at price finalization in the quarter, are you looking at just the fourth quarter of ’09?

Paul Cheng - Barclays Capital

Yes sir.

David S. Rosenthal

Yes, that number on an absolute basis was less than $100 million.

Paul Cheng - Barclays Capital

$100 million loss or $100 million gain?

David S. Rosenthal

Just under $100 million loss.

Paul Cheng - Barclays Capital

And is it 50-50 between U.S. and international or?

David S. Rosenthal

Yes, pretty close. I mean the number literally is not that much. But yes, close enough.

Paul Cheng - Barclays Capital

And how about inventory gain or loss? Anything?

David S. Rosenthal

You know interestingly enough if we look at the LIFO effects for example in the absolute basis for 2009, about $200 million across the Downstream, positive. But again not a lot of money there.

Operator

Your next question comes from Faisel Khan – Citi.

Faisel Khan - Citi

Just a couple questions, one on exploration expense. Your exploration expense seems to have doubled over the course of the year. Can you talk about what’s driving that and if that represents your level of activity going forward as well?

David S. Rosenthal

Yes, if you look at our exploration expense across the year it did increase significantly in ’09 over ’08, really reflecting just a very robust exploration program that we had across the year. So we had a lot of activity which drive seismic costs and we also had dry hole expense associated with some deepwater wells. But yes, I mean ramp up the activity, expenses go up a little bit, but again we are as you know working on a very extensive exploration program in ’09 and as we move into 2010 as well.

Faisel Khan – Citi

And what major exploration wells are you drilling right now?

David S. Rosenthal

If you look at what’s going on in the business right now, we’ve got a number of wells actually drilling. We have as I mentioned earlier our second well in the Philippines is under way. We’re also drilling our second well in Libya and preparing to drill a number of other wells as the year progresses. But again, I’ll say that we’re looking forward to giving you a complete rundown on all the wells for 2010 and the continuation again of this robust program we started in March. And we’ll talk about the Black Sea and we’ll talk about a number of other areas, both in conventional and unconventional. And we’ll look forward to talking a lot about that in March.

Faisel Khan – Citi

CapEx sequentially was up quarter over quarter. Is that because of timing of projects or should we consider that level of CapEx is going to continue into the next few quarters?

David S. Rosenthal

CapEx was up in the fourth quarter versus the third quarter, really driven by a couple of events. We had the Firebag acquisition that I mentioned up in Canada, that high quality acreage opportunity that we had. We also had some other acreage position captures elsewhere. And then as you mentioned we saw a nice ramp up in project work, Kearl for example, and a number of other projects. So yes, we finished the year strong but as expected and certainly reflecting just the success we’re seeing, both acquiring new resources as well as the continued development with the projects that we have in the pipeline.

Operator

Your next question comes from Doug Leggate - BofA Merrill Lynch.

Doug Leggate - BofA Merrill Lynch

Just a couple of quick things, I hope. First one is real easy. It looks like you had the working capital build and the cash flow statement. Just quantify that for us, please?

David S. Rosenthal

Yes, if you look in the fourth quarter of ’09 versus the fourth quarter of ’08, we had a little working capital impact, a few hundred million dollars but nothing real large.

Doug Leggate - BofA Merrill Lynch

What about the absolute, David?

David S. Rosenthal

The absolute change if you look just in the fourth quarter, not much, a couple hundred million dollars.

Doug Leggate - BofA Merrill Lynch

The more detailed one, David, was I want to kind of build on one of the earlier questions. I think it was from Jeff, regarding the $180 million. First of all, what was the absolute impact in the fourth quarter of all those small bits and pieces? Because what I’ve been watching here and what I’m trying to really get a handle on is your, on a very simple basis, your capture rate on the Upstream in the first three quarters of 2009 deteriorated quite substantially I guess versus the legacy portfolio. Something you actually showed in your strategy presentation back in ’06 to demonstrate how you were securing the leverage to the Upstream, but it looks like it’s deteriorating as your production has become more gassy and I’m just trying to understand what’s going on there. If you could offer any suggestions, that would be great.

David S. Rosenthal

Sure, Doug. You know as we look across the year and we look particularly heading into the fourth quarter, again I would say if I look sequentially in that $380 was really just a number of items, a few tax items, but again nothing substantial. We did see and this may be a big piece of what you’re looking at, we did see a reduction in ongoing operating expenses. You know I think we’ve seen a lot of change in our expenses over the years. We’ve had these major projects start up and ramp up and the timing of those, relative to the revenues that those projects start generating, and so I think what you’re seeing now as we head into the fourth quarter you’re really seeing all of the projects up, running flat out, and generating the net profit that we expect.

But other than that, I really wouldn’t have anything specific to note.

Doug Leggate - BofA Merrill Lynch

Just to be clear, David, and I don’t want to belabor the point, so if the $380 million was sequential, what was the absolute in the quarter of positive [one] effects?

David S. Rosenthal

Yes, Doug, we don’t typically give the value of those things because there’s just a number of them every quarter, and I’d be running down a long list and some would be positive and some would be negative. But I really think the real key though is as we look at the year progresses, we’re really starting to see things come online the way we expect. If you look at our net income per barrel in the fourth quarter, the $15 that was in line with our expectations. So as I look at all of this I’d really just say we’re executing the plan and we ended the year strong. I mean we ended the year strong from an operational standpoint, a production standpoint and an earnings standpoint. And we look forward to that momentum continuing on as the year gets started.

Doug Leggate - BofA Merrill Lynch

The tax rate as the mix changes with all these new projects, could you offer any kind of guidance as to what you’d say a run rate tax rate as we move through in 2010?

David S. Rosenthal

Well, Doug, you hit the word right on the head. It’s mix. It’s mix of the businesses, Upstream versus Downstream versus Chemical, the geographic mix of those businesses within the business lines, and as we move quarter-to-quarter in looking down the road I tell you I really couldn’t give you any guidance that I think would be helpful. We’ll just have to see how the businesses perform, where those businesses are performing, how the economy goes over the course of the year will of course drive a lot of our earnings. And we’ll just have to see how that shakes out. But it really is a mix effect as I look at the last couple of quarters.

Operator

Your next question comes from Jason Gammel - Macquarie Research Equities.

Jason Gammel - Macquarie Research Equities

I just want to clarify, I think you made a comment that you expected all the P&G, LNG volumes to be marketed this year. I still have about 1.3 million tons per annum, looks to me that hasn’t been contracted. So if you could just confirm that and then also talk about how the Pacific Basin LNG markets are looking now, given your own efforts as well as the Gorgon Project, whether they’re fairly well satiated facts and figures or if there’s still appetite there.

David S. Rosenthal

Let’s hit the first one on the P&G, LNG, you’re right. We still are firming up the rest of those SPAs. We’re close to completion of the balance and would expect to have those wrapped up here in the first quarter as well as the other conditions for financing. So that one progressing right along as we expected and we continue to be pleased with that. When we look at the overall market for the Pacific Basin LNG business, I think as you’ve seen we’ve generated a bit of an advantage as an early mover into that market, both out of Qatar and now P&G and Grogon. So we’re confident that our projects are well positioned and well timed and from a capital efficiency and technology standpoint will deliver a competitive advantage for us as the years go by. So we’re still very pleased with these investment decisions. We’re happy with how things are progressing and I think the ability for us to leverage both our project development experience as well as our marketing advantages that we’ve really gained over the last few years are going to be very helpful and should lead to very successful projects for us.

Jason Gammel - Macquarie Research Equities

Is it safe to say, though, that you’re quite happy to have all your volumes contracted right now and not having to be out in the marketplace?

David S. Rosenthal

I think I’d say we’re very pleased with how things are going and wouldn’t change anything looking back. So no, we’re happy with how things are going.

Jason Gammel - Macquarie Research Equities

On the Ras Laffan petrochemical project, David, will you be participating in the Upstream supply feedstock to that project?

David S. Rosenthal

No, that’s a joint venture between us and Qatar Petroleum really on the Chemical side. Although you know it’ll be sourced from a number of different projects out of the North Field, but I wouldn’t want to get into anything specific in terms of which development or timing of that. It’s really a very large, Chemical investment designed to take advantage of the feedstocks that are on offer as well as the technology and proprietary products that we can produce out of that. So we’re really looking forward to progressing that project.

Operator

Your last question comes from Mark Gilman - The Benchmark Company.

Mark Gilman - The Benchmark Company

When you were going through the fourth quarter 2009 versus 4Q 2008 volume reconciliation, the price spend component of the entitlement is a positive 1?

David S. Rosenthal

Yes.

Mark Gilman - The Benchmark Company

And prices in fact were up $20 a barrel. I was wondering if you could explain to me what that’s about and how that works.

David S. Rosenthal

Sure. You’re right, oil prices were up and that gave us a negative impact, but gas prices were down considerably and that has an impact on us, particularly in Canada. But yes, those two were pretty much offsetting.

Mark Gilman - The Benchmark Company

Can you talk qualitatively how you’re going to report both operationally in terms of production numbers as well as financially the West Qurna venture?

David S. Rosenthal

Mark, it’s a little early for me to be giving specific comments on that, given where we are at this stage and how things are being developed and what we’re working on. So I’d say give us a little time to sort those things out and we’ll be giving more information on Iraq as we go forward.

Mark Gilman - The Benchmark Company

Give me an update, if you could, on where things stand on Upper Zakum?

David S. Rosenthal

From what regard in particular, Mark?

Mark Gilman - The Benchmark Company

In terms of the project that you’re undertaking there.

David S. Rosenthal

Oh, sure, the project is performing well. We’re meeting expectations as we apply technologies and the expertise that we brought to the project. And the results that we’re seeing are meeting expectations. And I think as we look overall at that project, it’s very positive and we’ve been able to do a number of things there to increase those volumes, just as we had planned to do. So thank you for the question. That’s a success story for us.

Mark Gilman - The Benchmark Company

Can you quantify the increase you’ve achieved at all?

David S. Rosenthal

No, for commercial reasons we really can’t give that specific number.

Operator

And at this time I’d like to turn the call back over to David Rosenthal for closing comments.

David S. Rosenthal

Thank you very much. Despite the challenging economic environment, we remain confident that our long term perspective, financial strength and disciplined investment approach will continue to deliver superior, differentiated results and positions us well for the future. I’d like to thank everybody for your time today and we look forward to seeing you in March. Thank you very much.

Operator

And this does conclude today’s conference call. Thank you for your participation.

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Source: Exxon Mobil Corporation Q4 2009 Earnings Call Transcript
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