In a quest to become more profitable Exxon Mobil Corp. (NYSE: XOM) is shifting away from natural gas and more toward liquids in unconventional U.S. plays, executives said as the company’s overall second-quarter production fell 7% compared to a year ago.
The Irving, Texas-headquartered company said it produced 3.6 million barrels per day of oil equivalent during second-quarter 2018. Liquids production fell 3%, while natural gas production fell 13%.
“Lower entitlement resulting from higher prices reduced volumes as did continued efforts to high-grade our portfolio with the largest impact versus last year coming from divestment of our operated assets in Norway,” Neil Hansen, vice president of investor relations, said during a conference call July 27. “Increased downtime primarily for scheduled maintenance also reduced volumes in the quarter with the most significant impact coming from Canada.”
Second-quarter net income of $3.95 billion was up from $3.35 billion in the year-ago quarter. But downstream earnings—down 47%—weighed heavily on earnings due to “heavy turnaround and maintenance activities” at refineries. The results were below analysts’ expectations.
“We think Exxon Mobil’s 2Q18 results will have a negative impact on the shares’ near-term performance. EPS [earnings per share] of $0.92 was materially below consensus and our estimates of $1.27 and $1.20, respectively,” Barclays said in a note that also pointed out the global production miss and U.S. liquids as the “lone bright spot.” The quarterly result “continues a recent trend of rather large earnings misses, and we believe investors may begin to question the through-cycle profitability strength once held by the company.”
The production decline was in line with the company’s expectations; however, Hansen said the more pronounced drop in gas production—U.S. unconventional gas volumes fell by 12% reflecting “minimal investment”—represents Exxon Mobil’s near-term effort to focus on growing higher-value production.
The company divested some of its U.S. Rockies gas production—which equated to about 20,000 boe/d, executives said.
“I know everybody wants to see a continuous growth quarter on quarter,” Exxon Mobil senior vice president Neil Chapman said, referring the company’s unconventional production. “I’m telling you it’s going to be lumpy because … we’re going to do it [raise production] in the most capital efficient manner we can. If that means drilling a whole bunch of wells … and fracking them six months later because that’s a way of being capital efficient we are going to do that. I can assure you.”
Earlier he pointed out that all volumes are not equal, considering the range of profitability for volumes produced.
“This shift of value is also evident in the growth we saw in liquids, which more than offset decline in mature assets as production in the Permian and Bakken increased compared to the same quarter last year and production from Hebron continued to ramp up,” Hansen said.
Permian and Bakken production jumped 30% year-on-year, surpassing 250,000 boe/d during the second quarter.
Production in the Permian grew 45% compared to first-quarter 2018 with more than 50 new wells online and 34 Exxon-operated rigs active—17 each in Midland and Delaware. The company aims to triple its Permian production by 2025.
Meanwhile, Exxon Mobil continues to expand its terminal to accommodate more throughput. The company has also sealed more deals to export Permian crude to the Gulf Coast, according to Chapman.
Some operators have been plagued by infrastructure constraints in the basin, but Exxon Mobil said it has secured enough liquid evacuation capacity to support growth until 2022. Plus, “our Gulf Coast refineries are already processing our production levels and more,” Chapman said.
U.S. conventionals is one of the company’s primary growth drivers for the midterm. Others include LNG projects in Papa New Guinea and Mozambique, deepwater Brazil and deepwater Guyana, where the company recently increased its estimated gross resources in the Stabroek StabroekBlock to more than 4 billion barrels of oil equivalent. Exxon Mobil’s partners offshore Ghana are Hess Corp. and China’s CNOOC.
During the second-quarter Exxon made its 8th discovery in the region with the Longtail well hitting more than 256 ft of oil-bearing sandstone. “It establishes the Turbot area as a potential hub of over 500 million oil equivalent barrels recoverable,” Chapman said while providing an update on the company’s Guyana activities.
Conversion work for the Liza Destiny FPSO is progressing, and Liza Phase 1 remains on track for first oil in 2020, he said. Partners are awaiting approval for the larger Liza Phase 2, having submitted in June a draft environmental impact assessment and the development plan to Guyanese authorities. Startup is expected in 2022. A third phase is anticipated on the block at the Payara Field with a final investment decision expected in 2019. If sanctioned, an FPSO would be used to produce about 180,000 bbl/d as early as 2023.
“The collective discoveries on the block to date have established the potential for up to five FPSOs producing over 750,000 bbl/d by 2025,” Chapman said.
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