Exxon May Soar On New Potential In Mexico

Jul. 3.12 | About: Exxon Mobil (XOM)

Things have been looking great for Exxon Mobil (NYSE:XOM) lately. Anadarko Petroleum (NYSE:APC) recently indicated that Exxon may become a partner in Anadarko's Gulf of Mexico operations. Anadarko is already partnered with Plains Exploration & Production Company (NYSE:PXP) on its deepwater Phobos project in the Gulf, and according to Anadarko Vice President of Investor Relations and Communications, John Colglazier, Exxon may enter the project with up to a 20% working interest, which would reduce Anadarko's interest from 50 to 30%. In exchange, Anadarko could receive cash and a drilling carry, which would potentially cover the cost of the project's first exploration well. This would be beneficial for Exxon Mobil, and represents just one of the recent successes the company has seen lately. Below, I will show how Exxon's current position within the energy sector makes it a strong investment now.

Looking Deep for Gains

Exxon Mobil is continuing to discuss its interest in investing in Mexico. CEO Rex Tillerson recently indicated that Exxon Mobil's interest is contingent on owning the energy reserves it would be drilling for, not just receiving bonuses on production as current contracts between Mexico and foreign producers allow. Since Mexico's national oil company Petroleos Mexicanos, or Pemex, does not have the equipment, knowledge, or capital to begin production on unconventional and deepwater assets that lay within Mexico's boundaries, and the traditional reserves Pemex is currently drilling are rapidly depleting, I believe it would be in Mexico's best interest to concede resource interests to encourage foreign investment, as the government indicates it wants to do.

Whether it will do so or continue to award contracts to smaller foreign companies based on the bonus structure remains to be seen, but a true opening of Mexico's market could lead to a bonanza similar to the U.S. mid-continent, since Pemex estimates that it has 10,161 mmbcoe crude oil, 1,233 mmbcoe gas liquids, and 2,402 mmbcoe natural gas in proved reserves. Its possible and probable reserves add another 30,000 mmbcoe altogether, representing a huge opportunity for Exxon Mobil if Pemex and the Mexican government are ready to negotiate.

Exxon Mobil recently decided to withdraw its exploration plans for Poland's shale gas deposits after two test wells failed to yield viable production. In response, Chevron (NYSE:CVX) indicated that it "remains committed" to unconventional gas in Poland as it evaluates its own early results.

Since little shale gas production exists in Poland, the commercial viability of its unconventional deposits remains largely unknown. Producers also face a complicated political structure with no one agency responsible for regulation, though that is expected to change in the near future with the introduction of a new law. Should the Polish production environment become more favorable, Exxon Mobil could re-enter Poland at a later time; I think it's a good move for Exxon Mobil to remain focused on better proven plays for now.

Changing Industry Reveals New Challenges

Tillerson is railing against current natural gas prices, reconfirming earlier this week what most in the industry already knew: Prices below $4 to $5 per mmBtu fail to break the cost of production without hedges, so the current market is not sustainable for most producers. Exxon Mobil has more skin in the game than most, since after its acquisition of XTO Energy two years ago it is now the largest U.S. onshore natural gas producer. What was newsworthy about Tillerson's speech is that it broke with the company's previous indication that it was not losing too badly with its natural gas bet on XTO in stark terms, as Tillerson now says Exxon Mobil was "making no money. It's all in the red on natural gas." Still, a company like Exxon Mobil can afford to lose on natural gas prices in the short term, but others like Encana (NYSE:ECA) and Chesapeake Energy (NYSE:CHK) are facing enormous funding shortfalls and hamstrung operations due to the market.

As licenses for oil and gas exploration become tighter, producers are finding themselves centered in various international border disputes. Earlier this month Royal Dutch Shell (NYSE:RDS.A) and Exxon Mobil were drawn into one such dispute between Guyana and Venezuela, and now Exxon Mobil's interests are being impacted by an even larger dispute between China and Vietnam. An exploration block Vietnam awarded to Exxon Mobil in what it claims as its territory is now being offered for bid by the government of China, which is claiming the same territory as well as other blocks Vietnam previously awarded to competing producers.

Tensions are high in the entire South China Sea as China tries to assert its dominance and retain as much energy reserve as possible as its explosive growth drives energy demand, so I think that disputes such as these will become far more common in the future. What remains to be seen is how oil and gas companies like Exxon Mobil will evolve to meet the diplomatic challenges that the changing industry is now facing.


Exxon Mobil's aging infrastructure and hot weather patterns across the nation contributed to several minor incidents in recent weeks, including a release of hydrogen sulfide at its Baytown, Texas refinery, a small benzene leak at its Baton Rouge refinery, and a breakdown leading to unplanned flaring at its Torrance, California refinery. Considering that Exxon Mobil is a leading refiner with widespread operations, minor incidents are expected, but in my view a current climate of environmental litigation should have all oil and gas producers stepping carefully. Anadarko is battling a lawsuit that could see damages of up to $25 billion as pursued by the Environmental Protection Agency, while Chevron is battling a similar move by the government of Ecuador, and Exxon Mobil itself just settled for $7 million a lawsuit brought against it in Rhode Island for well water contamination.

Exxon Mobil is currently trading around $85 a share, up nearly 10% from the beginning of this month as it recovers with the wider industry from an earnings season slump. A dividend yield of 2.7% offsets a relatively high price to book of 2.5 and forward price to earnings of 9.2. Exxon Mobil is trading close to its three year high. With a diversified base supporting a relatively stable value, Exxon Mobil is a definite buy for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.