Exxon Mobil’s (NYSE:XOM) Papua New Guinea (PNG) liquefied natural gas (LNG) project is running four months ahead of schedule and is expected to ship the first LNG cargo to Asia by mid-year. The company holds a 33.2% operating stake in the $19 billion project. Apart from lower production costs, the proximity to the fast-growing Asian markets, which are driving most of the growth in LNG demand, is also a key aspect of this project. Its start-up also falls in line with Exxon Mobil’s current strategy of boosting the proportion of liquids (crude oil, natural gas liquids, bitumen and synthetic oil) and liquids-linked gas in its portfolio for better margins.
We currently have a $92 price estimate for Exxon Mobil, which values it at around 12x our 2014 GAAP EPS estimate of $7.68, and is almost in line with its current market price.
The PNG LNG Project
The PNG LNG project is a 6.9 million ton per annum (MTPA) integrated LNG project operated by Esso Highlands Limited, a subsidiary of Exxon Mobil Corporation. It is expected to produce over 9 trillion cubic feet (tcf) of gas and 200 million barrels of associated liquids over its life. The gas will be sourced from the Hides, Angore and Juha gas fields and from associated gas in the Kutubu, Agogo, Moran and Gobe Main oil fields. All of the contributing fields are located in the Southern Highlands and Western provinces of PNG. The gas will be conditioned in the PNG Highlands and then transported to the LNG plant located northwest of Port Moresby. After being liquefied at the LNG plant, the gas will be loaded onto ocean-going tankers to be shipped to international markets. A couple of key aspects of the project are discussed below:
Lower Production Costs: The PNG LNG project boasts of a substantial certified reserves base with minimal impurities, which means lower costs associated with the processing of natural gas before sending it through the LNG plant for liquefaction. Apart from this, the existing onshore infrastructure base from oil field development projects in the area also lowered capital costs associated with the project. Just to give some perspective, Chevron-operated Gorgon LNG project in Australia, which is also under construction, is expected to cost $54 billion or $3.46 billion per MTPA of LNG capacity. In comparison, the PNG LNG project is expected to be completed at a cost of just $2.75 billion per MTPA of LNG capacity.
Proximity To Asian Markets: The share of LNG in global natural gas trade has grown steadily over the past few years, primarily due to the fact that natural gas imports by Asian markets, which rely mostly on LNG (~80%), have been growing at a much faster rate than the rest of the world. Therefore, being located closer to the center of demand is a key advantage for the PNG LNG project over many other upcoming projects around the world, as lower transportation costs reduce the total per unit cost of delivered LNG. By our estimates, shipping LNG from PNG to Japan would cost anywhere between $0.5 to $1 per million British thermal units (MMBTU), cheaper than the upcoming LNG projects on the U.S. Gulf Coast and East Africa.
Importance To Exxon Mobil
Amid depressed natural gas prices in North America, energy companies are increasingly focusing on boosting their production of liquids and LNG to realize better upstream margins. Exxon is not an exception to this trend. In fact, it has been one of the most affected companies by the sharp decline in U.S. natural gas prices. This is because its production-mix was significantly impacted after it 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 production growth came from the U.S., where natural gas prices have not been favorable to the company’s upstream earnings since.
However, Exxon is now focusing on liquids and LNG production growth to boost its upstream earnings. Liquids and LNG projects are expected to contribute more than 90% to the company’s planned production ramp-up of 1 million barrels of oil equivalent per day by 2017. Liquids are generally 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 (BOE) of natural gas.
According to our estimates, the PNG LNG project is expected to boost Exxon’s annual liquids and LNG production volume by more than 60,000 BOE per day at its peak, which is equivalent to more than a 4% increase in the average liquids production rate achieved by the company’s subsidiaries in 2013.