ExxonMobil Corp., whose North American portfolio washes across eight million net acres, is scooping up more liquids-weighted land and has begun to shift some of its natural gas development to more oily plays, the company's top guns told financial analysts on Thursday.
CEO Rex Tillerson and his executive team met with analysts at the New York Stock Exchange to talk shop for a few hours, with most of the analysts' questions centered on what the supermajor plans to do in light of low domestic gas prices. The short answer from Tillerson: not much.
The world's largest public company and biggest U.S. gas producer is in it for the long haul, he said. Less than two years ago the company paid close to $43 billion to acquire one of the top shale producers in the United States, XTO Energy Inc.
ExxonMobil already was a top producer both offshore and onshore and it was an entry leader into the Horn River Basin of Canada. The XTO buy gave it an advantage in the Barnett, Haynesville, Marcellus, Fayetteville and Woodford gas shales, the San Juan/Raton Basin, the Uinta Basin, East Texas Cotton Valley/Bossier Sands, the Permian Basin, Bakken oil shale and along the Gulf Coast.
XTO was a gassy company. ExxonMobil, which writes an annual global energy forecast, believes that by 2040 it will be a gas world. At the time ExxonMobil closed the transaction in late June 2010 XTO's reserves base was estimated at 45 Tcfe. In less than two years the subsidiary's reserves base has grown to 82 Tcfe, an increase of 81% and a cost of 23 cents/Mcfe.
Tillerson said he's often asked, "Why are we drilling in some dry gas basins? Why XTO? Why the whole deal?..We view the world [gas] supply as vital..." The XTO transaction "would be the same thing if we had gone out and discovered a 10 billion boe field. We would have gone out and studied it and appraised it. And now we have gone out and appraised it and have figured out how to get the maximum value.
"Now that's the same model all others would have followed. But they don't have the resources. They don't have the financial resilience we have. They don't have the development resources. We can be patient. They don't have a lot of money. It's what we do with complex resources. It's the same thing we'd do with a single bin barrel in Africa...
"It's very much about how we are going to make that pay off not this year and not last year and not next year but in many years...Strategically that's what's behind building that resource capacity," he told analysts.
"We have massive investment projects," Tillerson said, when asked at what gas price the company might stop investing in some of its global projects. More than half (51%) are gas-related. "We will be carrying a fair amount of construction costs that won't be producing for some time...Historically it is a larger percentage of capital employed and that's what capital expenses have done. They are opportunity-driven with higher costs today.
"When you talk about a specific gas price, I'm not going to give any signals to anybody on that. They are very basin-specific. There's not a price at which you'd say everything is performing where you want it to..."
Natural gas prices have dropped steeply since ExxonMobil consummated its acquisition of XTO on June 28, 2010. On that day, physical trading at the Henry Hub for next-day delivery averaged $4.85/MMBtu, more than twice the $2.24/MMBtu average recorded Wednesday, according to NGI's Gas Price Index.
"There's a function of where XTO was when it came onto the books, of the existing resources number, which can be quite different, depending on which basin you are talking about," said the CEO.
"There's not really a [gas price] number," said Tillerson. "That's not the way we talk about it. In all honesty, we don't look at the business that way. We look at the costs, what we can sell the resource for, the returns that we want to have...with the XTO purchase, we have to continue to capitalize on the costs for the future.
"It's not about today; it's really about the future we see and the view that we have to be a significant participant in the supply in this type of resource. This portfolio of the future will be the type of cash cow of future investments. It's what the conventional portfolio provided in the past."
As to whether ExxonMobil has changed its natural gas/liquids project mix in North America in light of prices, Tillerson said, "First of all, I don't comment on what gas volumes are doing with current capacity like others are doing. Historically, that's not viewed very favorably by those on price collusion. We want to be silent on that..."
Senior Vice President Andy Swiger, who provided the North American unconventional upstream outlook to analysts, said the company's activity is "shifting to "more liquids-rich acreage...We're acquiring more liquids-rich acreage at the same time...Having said that, there are some dry gas plays...where it doesn't make sense to us to continue investing..."
The unconventional gas business was "building for a long-term future through a magnitude of projects...testing of new technologies and different types of laterals, different types of frack [hydraulic fracture] stages, learning early on, which is important for the future. Some dry gas drilling is continuing for good reason but we are continuing to shift to a more liquids portfolio."
Swiger said ExxonMobil's unconventional reserves base has doubled since 2005 and today accounts for "more than 40% of the total resource base. Gas growth has been balanced by a strong position in heavy oil and oilsands. We have a deep inventory of attractive opportunities."
Before 2005, most of ExxonMobil's unconventionals in North America were concentrated in heavy oils, said Swiger. "Now it's split between oilsands and gas...We also have about 50,000 drilling locations."
Although the company is drilling more liquids targets, there has been "no change in the mix of projects" from 2009 to 2014, said Senior Vice President Mark Albers. "We are crossing the threshold of more than 50% [of projects] to liquids...but there's been no fundamental shift there."Most of ExxonMobil's holdings -- 60% -- are in the Americas, Tillerson noted. In addition to its estimable unconventional natural gas reserves, it also has massive oilsands holdings in Canada, including the Kearl project, which is scheduled to begin operations later this year.
By 2016 the company intends to add more than 1 million boe/d through various projects around the world. Close to 80% of the new additions are liquids volumes, Tillerson said.