ExxonMobil Corp. (NYSE: XOM) managed to lower development cost per barrel to $8 in the Permian and $10 in Bakken, keep major project startups on track and remain focused on value, seeking oil in new frontiers such as Guyana and adding to its leading natural gas position.
But the strides were not enough to save the world’s largest publicly-traded oil company from the wrath of low commodity prices and weaker refining margins.
In second-quarter 2016, ExxonMobil saw its earnings fall to $1.7 billion, a nearly 60% drop from the same period in 2015, as it shaved its capex by 38% to about $5.2 billion. Production, the company said, was essentially flat: liquids production was 2.3 million barrels per day (MMbbl/d), up by 39,000 bbl/d; while gas production for the quarter was 9.8 billion cubic feet per day (Bcf/d), down by 366 MMcf/d.
“ExxonMobil is delivering on its commitments and continues to create long-term shareholder value through the cycle. At mid-year the corporation has earned $3.5 billion and generated $10.5 billion of cash flow from operations and asset sales amid volatile industry conditions, underscoring the resilience of our integrated business,” Jeff Woodbury, vice president of investor relations and secretary for ExxonMobil, said on an earnings call July 29.
The results were not what some expected.
Analysts with Simmons & Co. International, energy specialists of Piper Jaffray, called the results below expectations in terms of capex, production and cash flow.
“This was a tough quarter for XOM, particularly in light of the fact that the stock trades at an elevated premium (about 60% premium on cash flow), effectively discounting pristine execution and delivery,” analysts said in a note. “The 2Q EPS [earnings per share] was substantial, concentrated in upstream and international downstream, cash flow generation was perhaps not as bad as the headline result but still light vs. consensus, and production was light vs. our model.”
In a company statement, ExxonMobil CEO Rex W. Tillerson said the second-quarter financial results reflect a volatile industry environment.
“ExxonMobil remains focused on business fundamentals, cost discipline and advancing selective new investments across the value chain to extend our competitive advantage,” said Tillerson. “The corporation benefits from scale and integration, which provide the financial flexibility to invest in attractive opportunities and grow long-term shareholder value.”
Since commodity prices began falling two years ago, the result of too much supply and not enough demand, companies have watched their profits fall and have, in turn, reduced spending, sought technology and operational efficiencies, and become more particular in M&A moves.
“It’s a challenging environment for the integrated” oil producers, Brian Youngberg, an energy analyst with Edward Jones, told the news agency. “The key is to manage the cash flow as best they can and continue to execute on projects, which they do appear to be doing.”
ExxonMobil, which plans to purchase InterOil Corp. in a more than $2.5 billion deal that expands its LNG position in Papua New Guinea, said it is on track to achieve 10 major project startups in 2016-2017.
- Hebron offshore eastern Canada, which is expected to start up in late 2017. Woodbury said fabrication of the utilities and process module for the gravity-based structure is complete. The Hebron oil field could produce more than an estimated 700 MMbbl of recoverable resources.
- Upper Zakum in Abu Dhabi, where Woodbury said aggregate gross production is about 670,000 bbl/d and will hit 750,000 bbl/d by 2018. Eight drilling rigs are currently running on the artificial island.
Looking further ahead, the company expects the recently sanctioned Tengiz expansion project to start up in 2022. The project at the Tengizchevroil-operated field, of which ExxonMobil is a 25% shareholder, aims to grow oil production capacity by up to 300,000 bbl/d.
In The Spotlight
Development planning is well underway at one of ExxonMobil’s most-watched discoveries: Liza offshore Guyana, where the Liza-2 appraisal well in the Stabroek Block recently confirmed what the company is calling a “world-class discovery” with recoverable resources of up to an estimated 1.4 billion oil equivalent barrels.
“ExxonMobil along with its partners are progressing development planning activities on an early production concept involving a floating production storage and offloading facility along with related subsea production systems,” Woodbury said. “The final investment decision will be based on a variety of factors including further Liza appraisal drilling, regulatory approvals and market conditions.”
Last week the company started drilling northwest of the Liza-1 discovery well to test the Skipjack prospect. From there, it will return to the Liza-2 site for another appraisal well.
“Clearly, Liza helped to derisk a new play in a new basin, but as you know all exploration wells do carry inherent risks,” he said, noting the company has prospects lined up in the block and seismic work in progress to help determine future move. “You don’t want to outrun your headlights.”
Back At The Ranch
Meanwhile, ExxonMobil continues to grow production in its unconventional operated acreage in the U.S.
“Since 2013 we have more than tripled our gross operated production from the liquids-rich Permian and Bakken plays; approximately 85% of this is liquids,” Woodbury said. “We have maintained a relentless focus on reducing costs and improving efficiency while maintaining high operational integrity.
“We have continued to reduce drilling cost per foot, implement efficiencies and capture market savings to achieve substantial cost reductions,” he added. “With longer lateral lengths and improved completion designs per well hydrocarbon recovery has dramatically improved.”
The cost improvements, which include bringing cash operating cost per barrel down to $8, means a chunk of ExxonMobil’s drill well inventory is economic at about $40/bbl.
“Over 2,000 drillable locations in the Permian and Bakken yield 10% rate of return at $40 per barrel,” Woodbury said. “This drill well inventory equates to nine years of continuous drilling at 2015 rig levels, providing ExxonMobil the flexibility to progress profitable, short-cycle opportunities and adjust activity in response to market conditions.”
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