Exxon Mobil (XOM) released its first quarter 2012 earnings on April 26, and though its earnings missed analyst expectations, the stock still closed the day around $86, 1% higher than its intraday low. An analyst poll shortly before the earnings release predicted earnings per share of $2.10. Exxon Mobil's reported earnings per share came in at $2. Overall, Exxon Mobil reported a fall in profits of 11%. Comparatively, competitor Royal Dutch Shell (RDS.A) also released earnings on April 26. In contrast to Exxon Mobil, Shell reported a profit increase of 11% compared to the same quarter last year.
Exxon Mobil indicated that lower US natural gas prices were responsible for $300 million of its decline in earnings. In response to low dry gas prices, Exxon Mobil is deploying a similar strategy to competitor BP (BP), increasing its focus on liquids while downplaying its dry gas drilling. Exxon Mobil's strategy will see it entering the Utica shale, where it will join Chesapeake Energy (CHK), Anadarko Petroleum (APC), Devon Energy (DVN) and Chevron (CVX), along with multiple smaller players.
Moving into Unconventional Plays - and Partnerships
The Utica shale represents equal challenges to all competitors: In places it underlies the Marcellus shale, which makes it almost prohibitively expensive for production until the Marcellus is exhausted, it reaches depths of up to 14,000 feet below sea level, though elevations of 2,000 to 4,000 feet are more common. Its total resource base is at present unknown. However, Exxon Mobil is in a strong position to exploit these unconventional plays with its drilling expertise.
Exxon Mobil holds records for 23 of the world's 27 longest-reach wells, as well as the world record for the longest horizontal reach well (7.1 miles, Sakhalin Island, Russia), so Exxon Mobil is better positioned than its competitors for the long-reach and horizontal challenges of hydraulic fracturing. Perhaps in preparation for a large-scale move into fracking and to shield itself from bad publicity surrounding the potentially negative effects of this relatively new process, Exxon Mobil is proving unusually vocal in its calls for transparency over the processes and fluids used in this procedure.
Media outreach to ease the average citizen's fears over fracking will benefit Exxon Mobil, as it plans to explore these shales thoroughly in the coming years. In order to maximize growth from this play, Exxon Mobil will need to acquire as much promising area on Utica and Marcellus as possible in the near future, since increasing competition in this area is already driving up lease prices.
Exxon Mobil recently commenced exploring the Black Sea, and is planning its exploration of the Kara Sea, both in Russia. It estimates that drilling will commence in 2014 to 2015. These explorations are possible due to its joint ventures with Russian oil giant Rosneft. This partnership includes plans to explore Western Siberia, troubling news for BP, since BP's joint venture with Alfa Access Renova, TNK-BP, locates substantially all of its operations in this area.
Similar to BP, Exxon Mobil believes that natural gas demand will rise as oil reserves run short in the coming decades. Despite the downtrend in US dry gas prices, dry gas prices internationally remain strong, and in some cases, are uptrending. In the first quarter, Exxon Mobil found significant gas resources in Tanzania with an exploration well, and plans a second well in the same area, with production to begin in the second quarter. Exxon Mobil also recently entered into an informal partnership with ConocoPhillips (COP), TransCanada (TRP) and BP to focus on liquid natural gas (LNG) rather than dry gas in Alaska's North Slope.
This move fits with Exxon Mobil's plans to grow its chemicals arm, Exxon Mobil Chemical, by using its liquid natural gas sources to manufacture higher-value chemical products. Exxon Mobil estimates that petrochemical demand will grow 1.5% above gross domestic product worldwide beginning in 2012, and it believes it can meet this demand through expanded unconventional natural gas drilling on the North American content. Given ConocoPhillip's approach of spinning off its underperforming chemical and refining processes and BP's de-emphasis of its chemical arm, Exxon Mobil may be able to leverage growth out of Exxon Mobil Chemical by attrition, if its predictions are correct and it can hold on until demand takes off.
Exxon Mobil's first quarter results reveal that its resources are declining, with overall upstream volumes decreasing slightly over 5% from the first quarter of 2011. Exxon Mobil is keeping up with the other supermajor players in replacing its reserves, with a 3% increase in proved reserves in 2011. BP is in its nineteenth straight year of greater than 100% reserve replacement. Shell's reserves remain essentially flat, while Total SA (TOT) saw a slight increase. Chevron is outperforming its competitors by this measurement, replacing its proved reserves by 171% in 2011.
Exxon Mobil's volume decline is due partly to asset divestitures and partly to declining reserves in its older blocks. Nearly 25% of Exxon Mobil's resource base is in Africa, and several plays there are reaching or passing peak production as reserves decline as much as 12% a year in Nigeria and Cameroon, and peak in the Congo. As the supermajors and others draw down these reserves, it will become further necessary to explore unconventional drilling processes to continue keeping reserves at normal levels.
If the world's total proved reserves were to fall unexpectedly, it could cause a sell-off on all carbon-driven energy stocks, from which the supermajors would be unlikely to recover. On the other hand, adding to proved reserves, as Exxon Mobil is attempting to do with its Rosneft partnership, could have the opposite effect and drive a strong competitor much higher than its peers. I expect Exxon Mobil to be generous in its press releases dealing with anticipated volumes in the Russian Arctic.
Looking at the value metrics, Exxon Mobil is currently trading around $86, with a forward price to earnings of 9.5 and a price to book of 2.6. Chevron is currently trading around $106, with a forward price to earnings of 7.8 and a price to book of 1.7. Shell is currently trading around $71, with a forward price to earnings of 7.3 and a price to book of 1.3. Total is currently trading around $48, with a forward price to earnings of 6.5 and a price to book of 1.3.
Compared to its peers, Exxon Mobil is trading high. However, given its partnership with Rosneft, which has the potential to be extremely lucrative, and its recent moves onto US shale plays, where it has strong expertise to compete, I think that Exxon Mobil has a strong future despite a weak quarter.