ExxonMobil (XOM, Financial) is the second largest company by total market capitalization in the U.S., second only to Apple (AAPL). It is also a key member of the super majors and a major stakeholder in the world’s oil and gas industry. The company fell short of meeting the predictions of Wall Street in the first quarter of 2012. When the first quarter of 2012 is compared with last year’s corresponding quarter, the spending of the company has increased by 12%. This rise in expenses negates the 8% increase in gross profits for the first quarter of 2012. The earnings per share of Exxon Mobil has decreased by 7% (from $2.14 per share to $2.00 per share in first quarter of 2012).
The less-than-satisfying results of the first quarter have raised concerns about the company’s major interest in the natural gas industry and relative lack of competitive investment in the oil industry, which is more lucrative. The potential of profits from the oil industry is much higher than the potential for the production of gas and Exxon being the largest producer of natural gas in the U.S., takes a lot of heat from the low profitability of natural gas. Just recently, Exxon's CEO has made remarks on the gas prices and how they are taking a toll on the company’s revenue. The natural gas prices went through a sort of recovery after the first quarter of 2012, but it is not likely to sustain for a long period.
Exxon and Rosneft Joint Ventures
Amid these remarks, Exxon has inked a new deal with Rosneft, a Russian oil and gas company, to explore oil reserves in Western Siberia. These U.S. and Russian oil majors have been signing and alluding to new agreements since last year. This deal is only a step in a long-term strategic partnership where Rosneft might also build an alliance with Exxon in Iraqi crude oil ventures. Exxon has already shaken hands with Rosneft to explore North American unconventional energy resources. It is yet to be seen how well these deals work for Exxon.
Shale Oil and Gas
Exxon has been heavily involved in exploring the benefits from the shale oil boom in North and South America. It is predicted that by 2030, both continents of America will become self sufficient in wake of shale oil and gas production. Shale oil and gas are produced from rocks (called oil shales) by chemical or thermal dissolution. Although, oil shales are not a new discovery but the reliance on these methods for production of energy has become more pronounced in today’s world where the crude oil reserves of middle-east are becoming unreliable due to political instability and rising petroleum prices. USA has the largest unexplored oil shale reserves while China is the leading producer of shale oil. Although Exxon is exploring these unconventional oil and gas reserves, the cost of refining from these sources is high which adds risks.
Oil reserves in Latin America
In the recent years some of the largest oil reserves have been discovered in Latin America including those in Brazil and Argentina. The recent discoveries in Brazil have put it in competition with US and Saudi Arabia in terms of crude oil deposits. Exxon has been exploring the oil fields in these areas since 1999 and is looking at strong competition from oil giant BP Plc (BP) and newly crowned member of global top ten (in terms of proven oil reserves), Petrobras (PBR) of Brazil.
Analysis
The question is that how strong Exxon holds in the oil industry to cope with the rising stakes, the low natgas prices and exploration of unconventional sources like shale oil and gas? Exxon’s competitors have also expanded their business in Brazil, a country that has potential to rank among the leading oil producers of the World. Exxon’s success will also depend on how productive the explorations of tight oil reserves in Western Siberia are for the company. The deal with Rosneft is both a political and geological risk so far. Exxon has shown stability in the past, profitability will depend on the success of its new ventures in oil industry and any increase in gas prices.
The less-than-satisfying results of the first quarter have raised concerns about the company’s major interest in the natural gas industry and relative lack of competitive investment in the oil industry, which is more lucrative. The potential of profits from the oil industry is much higher than the potential for the production of gas and Exxon being the largest producer of natural gas in the U.S., takes a lot of heat from the low profitability of natural gas. Just recently, Exxon's CEO has made remarks on the gas prices and how they are taking a toll on the company’s revenue. The natural gas prices went through a sort of recovery after the first quarter of 2012, but it is not likely to sustain for a long period.
Exxon and Rosneft Joint Ventures
Amid these remarks, Exxon has inked a new deal with Rosneft, a Russian oil and gas company, to explore oil reserves in Western Siberia. These U.S. and Russian oil majors have been signing and alluding to new agreements since last year. This deal is only a step in a long-term strategic partnership where Rosneft might also build an alliance with Exxon in Iraqi crude oil ventures. Exxon has already shaken hands with Rosneft to explore North American unconventional energy resources. It is yet to be seen how well these deals work for Exxon.
Shale Oil and Gas
Exxon has been heavily involved in exploring the benefits from the shale oil boom in North and South America. It is predicted that by 2030, both continents of America will become self sufficient in wake of shale oil and gas production. Shale oil and gas are produced from rocks (called oil shales) by chemical or thermal dissolution. Although, oil shales are not a new discovery but the reliance on these methods for production of energy has become more pronounced in today’s world where the crude oil reserves of middle-east are becoming unreliable due to political instability and rising petroleum prices. USA has the largest unexplored oil shale reserves while China is the leading producer of shale oil. Although Exxon is exploring these unconventional oil and gas reserves, the cost of refining from these sources is high which adds risks.
Oil reserves in Latin America
In the recent years some of the largest oil reserves have been discovered in Latin America including those in Brazil and Argentina. The recent discoveries in Brazil have put it in competition with US and Saudi Arabia in terms of crude oil deposits. Exxon has been exploring the oil fields in these areas since 1999 and is looking at strong competition from oil giant BP Plc (BP) and newly crowned member of global top ten (in terms of proven oil reserves), Petrobras (PBR) of Brazil.
Analysis
The question is that how strong Exxon holds in the oil industry to cope with the rising stakes, the low natgas prices and exploration of unconventional sources like shale oil and gas? Exxon’s competitors have also expanded their business in Brazil, a country that has potential to rank among the leading oil producers of the World. Exxon’s success will also depend on how productive the explorations of tight oil reserves in Western Siberia are for the company. The deal with Rosneft is both a political and geological risk so far. Exxon has shown stability in the past, profitability will depend on the success of its new ventures in oil industry and any increase in gas prices.
