Stalwart Exxon Mobil Corporation (XOM) turned in a strong second quarter, and is prepared to grow from that base with multiple projects across the globe. Even as its bottom line is pressured by lower-than-anticipated natural gas realizations, Exxon Mobil's oil production and international natural gas production remain strong, while its robust cash balance assures it the ability to continue carrying through the current price environment virtually indefinitely. Fortunately, very few expect that natural gas prices will remain unprofitably low for long, and Exxon Mobil is ready to move on new projects to boost production across the board.
Liquid Natural Gas Export Projects Taking Off
Exxon Mobil is following Cheniere Energy's (LNG) lead on liquid natural gas export from U.S. shores, filing for U.S. Department of Energy authorization for export from Port Arthur, Texas. The proposed export facility will be under a joint venture between Exxon Mobil and Qatar Petroleum, under the name Golden Pass Products. The proposed facility would handle up to 15.6 million tons of liquid natural gas a year through expansion of existing Port Arthur assets, and would include the build out of liquefaction facilities.
Meanwhile, across the Atlantic, Exxon Mobil and partner Royal Dutch Shell (RDS.A) are threatening to exit the Kashagan oil field in Kazakhstan unless granted greater control and an extension of existing production sharing contracts for a 20 year period. The field is scheduled to begin production next June, and an Exxon Mobil/Shell pull out could set back the first phase, but would not bring the project to a halt. One major reason for the firms' demands is the ballooning cost of the project, which is now nearly double original budget estimates of $24 billion, at $46 billion.
Neither Exxon Mobil nor Shell own a majority stake given the number of partners in the project, so a pull out would still be more harmful to Kazakhstan than to either of the firms. Long term, however, such a move could damage Exxon Mobil's relationship with the Kazakhstani government; as Exxon Mobil considers itself "a long term investor in Kazakhstan and plans to remain a major investor in the country," poor relations with the oil rich country could eventually be detrimental to Exxon Mobil's business.
Possible Action on the Vaca Muerta
Along with Apache (APA), Exxon Mobil appears to be considering a partnership with Argentinean YPF Sociedad Anonima ADR (YPF). The firms reportedly plan to meet in Houston later this month according to a YPF official, although neither Exxon Mobil nor Apache are confirming. Executives from Chevron (CVX) also met with YPF executives in August, and the primary topic for discussion was most likely YPF's need for a partner in the Vaca Muerta shale.
The unfortunately named Vaca Muerta, located in Argentina, is believed to be one of the largest shale oil deposits outside of North America. YPF owns 40% of its estimated area, 12,000 square kilometers out of 30,000 square kilometers known. Recent analysis of YPF's holdings determined that in one 1,100 square kilometer area YPF's resources are as high as 1.525 bboe. Ryder Scott Co LP independently estimated the prospective resources of the entire play at 21.1 bboe. If these estimates are true and even somewhat consistent across the play, this would place Vaca Muerta as one of the best potential exploration areas in the world
Exxon Mobil is already present on the Vaca Muerta, thanks to a partnership with Americas Petrogas, which commenced exploration this past July. The venture is still in the de-risking phase, but according to Americas Petrogas President and CEO Barclay Hambrook, "the first well has good indications and now we are onto the second well targeting the rich, thick Vaca Muerta shale formation." Though this sounds promising, more serious resources must be brought to bear on the Vaca Muerta to yield results; prior to the nationalization of its stake in YPF, Repsol SA estimated that $25 billion a year in investments is needed to develop the Vaca Muerta.
So what's not to like? The Repsol nationalization is now the major barrier standing between Argentina and energy exports, since no oil and gas company wants to run a serious risk of having its assets virtually seized overnight. Exxon Mobil no doubt remembers the upheaval related to the nationalization of its assets in Venezuela in 2007, and I believe it would be leery of making a major investment on its own. This is likely one reason for Apache's appearance at the table; besides a strong reputation on winning with what others view as risky plays, Apache also has experience on the Vaca Muerta. It began a long-term test of the play earlier this year, and plans future wells with Exxon Mobil as partner.
Still, a test well is a different proposition than a multi-billion dollar joint venture. Ultimately, it is likely that YPF will find the partner it seeks to help it fund the infrastructure needed and gain the technological capabilities it currently lacks for efficient unconventional drilling, and I think that Exxon Mobil and Apache are the most likely partners, despite the risk. Within the next decade, this could boost Exxon Mobil's production and revenues by unheard of margins if the agreement with YPF is exclusive and successful.
Exxon Mobil is currently trading around $89 per share, with a price to book of 2.5 and a forward price to earnings of 10.0. Chevron is currently trading around $111 per share, with a price to book of 1.7 and a forward price to earnings of 8.1. Shell is trading around $69 with a price to book of 1.2 and a forward price to earnings of 10.9. Apache is trading around $84 with a price to book of 1.1 and a forward price to earnings of 7.5. YPF is trading around $12 with a price to book of 0.8 and a forward price to earnings of 3.2.
Exxon Mobil's current value ratios are an excellent opportunity, especially considering its dividend yield of 2.38%. While other majors offer a higher dividend, Exxon Mobil's dividend is generally more stable, and is certainly generous, given that the firm as a whole is on a better footing than many of its peers.