Earlier in January, analysts at Bank of America Merrill Lynch downgraded Exxon Mobil (XOM, Financial) to neutral from buy which caused a dip in the oil giant’s shares. Just two days ago, Bank of America made another change by upgrading Exxon Mobil to buy with a price target of $110. As a result, Exxon Mobil’s shares have risen by more than 3% since Thursday and closed at $97.70 on March 28.
Exxon Mobil’s investors would welcome the recent rally as it comes after the company revealed that it would reduce its capital expenditure by 6% and was expecting flat production for the current year to $39.8 billion.
This was a disappointment as investors were expecting growth in production. The company has struggled to post any meaningful increase in output, despite spending a record level of $42.5 billion on exploration and production in 2013.
Last year, Exxon Mobil’s annual earnings dropped by 27% to $32.58 billion. Excluding the impact of gains from divestments, the earnings were down 6% to $7.37 per share.
The company’s oil equivalent production, excluding the impact of entitlement volumes, OPEC quota effects and divestments, was flat. The production of liquids increased slightly from 2.18 million barrels per day to 2.2 million barrels per day while natural gas production fell from 12.3 billion cubic feet per day in 2012 to 11.83 billion cubic feet per day in 2013.
Despite sluggish growth, Exxon Mobil’s long term outlook appears positive as it could start reporting 2% to 3% increase in output by 2017. The company has announced a total of 10 new major projects that could increase its output by 1 million barrels per day.
The company is eyeing significant growth in production from some mega projects in Argentina, Iraq and the Russian Arctic. Exxon Mobil is working on expanding its projects at Kearl oil sands in Canada and Upper Zakum oil project in United Arab Emirates. The company’s project at Papua New Guinea will start making its initial deliveries by the end of third quarter 2014.
Exxon Mobil, which was a late entrant in the shale gas arena, has upped its drilling efforts at home. The company is currently running all of its rigs at Bakken formation and Woodford Ardmore shale. Moreover, Exxon Mobil is adding more rigs at the Permian Basin. This should also give a boost to its domestic production in the coming years.
Exxon Mobil’s subsidiary XTO Energy has been partnering with other energy companies in an effort to increase its shale output. It has recently signed an agreement with a subsidiary of American Energy Partners to developed XTO’s Ohio leasehold.
Investors should note that American Energy Partners was founded by Chesapeake (CHK, Financial)’s founder and former CEO Aubrey McClendon. Rumors abound that the biggest American energy company could purchase the natural gas giant Chesapeake.
Exxon Mobil has also made a major natural gas discovery in Tanzania’s offshore Block-2 in a joint venture with the Norwegian oil major Statoil (STO, Financial). The two have made a fifth discovery of an additional 2 trillion to 3 trillion cubic feet of natural gas which has taken the size of the reserve in the block to a massive 17 trillion to 20 trillion cubic feet.
Moreover, Exxon Mobil has a solid reserve base of more than 25 billion barrels of oil equivalents of proved reserves, of which 66% are proved developed. Moreover, the company has enviable track record of having more than 100% reserve replacement for two straight decades.
Furthermore, over the last five years, Exxon Mobil has spent more on buybacks than any other S&P 500 company. Last year Exxon Mobil distributed $26 billion to shareholders through dividends and share repurchases. Overall, since 2009, Exxon Mobil has repurchased more than $90 billion of its shares.
Conclusion
Exxon Mobil’s growth has been sluggish and 2014 will be another year of little to no growth. However, the company’s long term outlook looks better as some of its mega projects could come online between 2016 and 2017. Moreover, a large acquisition of a company like Chesapeake could give a significant boost to Exxon Mobil’s earnings in the long term, on the back of the positive trends in the natural gas pricing environment.
For the current quarter, Exxon Mobil could benefit from the increase in natural gas prices amid the cold winter weather. According to data compiled by Thomson Reuters, analysts are expecting quarterly revenues and earnings of $110.48 billion and $1.90 per share, respectively. This could show year-over-year growth in revenues by 1.5% and a decline in earnings by 10.3%. For the full year (2014), Exxon Mobil’s revenues could drop by 1.9% to $429.96 billion while its earnings could increase by 2% to $7.52 per share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours of this publication.
