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ExxonMobil, Chevron Output Slips

ExxonMobil Corp., whose international portfolio more often than not has fortified it from the ups and downs of the volatile commodities market, failed to outrun global uncertainty and lower U.S. natural gas prices in the third quarter, with profits off 7% year/year to $9.6 billion, $750 million less than a year ago. Production also declined to its lowest level in three years.

Profits were $9.57 billion ($2.09/share), versus $10.33 billion ($2.13) a year ago. Revenue fell 7.7% to $115.71 billion. However, the report trumped Wall Street expectations, which were earnings of $1.95/share on revenue of $112.4 billion. Capital expenditures (capex) rose 7% to $9.2 billion. Cash flow from operations and asset sales was $14 billion, including asset sale proceeds of $600 million. The producer also repurchased $5 billion in shares from July through September.

Oil-equivalent output declined 7.5% to average about 4 million boe/d, the lowest level since 3Q2009. Excluding divestitures and one-time impacts, production fell 2.9%. North American output dropped about 5% sequentially.

Some of the decline in North American output resulted from downtime related to weather-related activity, "but the majority of it was kind of base decline," said investor relations chief David Rosenthal. "Really, the impact you are seeing [is because] we are shifting rigs from drilling primarily gas plays to drilling liquid-focus plays, and so the total rig count is down across the year and the proportion that's drilling liquids-rich plays versus gas has gone up...

"I think between that and some downtime, that really accounts for the bulk of the reason we are down." As to when gas output would grow in North America, Rosenthal couldn't say. "It would be dependent on how we bring things along and the market and that sort of thing, but clearly, you are seeing the impact of our changing focus from dry gas to liquids-rich opportunities."

ExxonMobil's continuing pursuit of "new opportunities" through mergers and acquisitions (M&A) should help to right the ship, he said. He told analysts during a conference call Thursday that ExxonMobil would continue to pursue new opportunities to find and produce oil and natural gas, with North American development focused on the Gulf of Mexico (GOM), as well as the "high potential" of its onshore liquids-rich unconventional opportunities.

Rosenthal disclosed that in 3Q2012 ExxonMobil built its GOM portfolio by acquiring a 20% working interest (WI) in the Phobos prospect, which is about five miles south of its Hadrian South discovery. Additionally, the company picked up a 35% WI in the Thorn development, which is near its deepwater Julia prospects. Phobos is expected to begin production by year's end; Thorn output is scheduled to start in about a year.

"We also continue to focus on high potential liquids-rich unconventional opportunities in North America, highlighted by activity in the Bakken, Woodford Ardmore and Western Canada," said Rosenthal. "In the United States, approximately two-thirds of our operated rigs are drilling liquids-rich opportunities, up from about 20% at the beginning of 2011."

Two months ago subsidiary exploration subsidiary XTO Energy Inc. agreed to acquire all of Denbury Resources Inc.'s Bakken Shale assets, which increased by half ExxonMobil's Bakken holdings to more than 600,000 net acres in the play (see NGI, Sept. 24). In October the company acquired Canada's Celtic Exploration Ltd., which added 545,000 net acres in the Montney Shale, 104,000 net acres in the Duvernay Shale and additional land in Alberta (see NGI, Oct. 22).

"The Woodford Shale and the Ardmore basin of Southern Oklahoma comprises our most active unconventional drilling program with 10 operated rigs delineating and developing more than 260,000 net acres of leaseholds," said Rosenthal. "In addition, we are advancing infrastructure projects to optimize a liquids-rich production from this area. For example, construction was recently completed on a 117-mile natural gas gathering pipeline from our operations in Southern Oklahoma to processing facilities in North Texas..."

ExxonMobil doesn't have a specific preference for targets in North America, he said.

"As we step back and look at our total capital budget and where we put our capex, we really don't have any limits in terms of type of resource or geographic focus," he told analysts. "We pursue all of the attractive opportunities that are out there. As you look across the last several years, you tended to see us sometime earning more capex and to oilsands or unconventional plays or LNG [liquefied natural gas], but all of that is really reflective of the opportunities as they are presented and our ability with our strong financial strength to basically take advantage of anything that's out there that's on offer that we think will provide shareholder value.

"As you've seen over the last couple of years, the bulk of that has been through internally generated capex, but there's also been some selective acquisitions...Going forward, you'll see us continuing to do what we've been doing, which is to look at all the opportunities that are out there on offer and taking advantage of any opportunity we have to really enhance the portfolio of our assets, with the focus continued on the longterm...We will continue to look for attractive opportunities wherever they present themselves."

Acquiring U.S. shale giant XTO three years ago helped build the North American onshore, but by combining the huge leasehold position with ExxonMobil's advanced technology, the merger cemented a happy marriage, Rosenthal said.

"Clearly, one of the synergies that we anticipated getting with the XTO acquisition that has been realized in the last couple of years is the ability to utilize the expertise...If you look at some of the acquisitions we have made in the U.S. or properties and some of the deals we have done onshore, offshore and I think Canada, a lot of the ability to properly evaluate the resource potential of those properties and assign value stems directly from the organization that came with the XTO acquisition, and that is working just as we had planned."

ExxonMobil looks at M&A the same way it looks at bolt-on acquisitions, or "resource-opportunity capture," Rosenthal said. "We look for the same thing in all. We do have a high-quality, large resource with upside potential and that has to be No. 1. We do think we can bring some synergistic value to those reserves and perhaps get a better return than someone else could, and that comes from either technology that we bring to the table, R&D [research and development] work, or operational expertise that allow us to then to get a better value for that than they might otherwise would have...So M&A versus outright capture of these resources -- the criteria for us remains the same and we really don't differentiate between the two."

For now, LNG exports from North America are not at the top of the list but are part of the company's long-term planning horizon. "We are in the early stages of assessing potential export options from Alaska, from Western Canada and from the U.S. Gulf Coast," said Rosenthal. "So we are fortunate to have large resources in each of those areas...But I say it's really a continuation of the strategy that we had in place now for the last couple of years."

On Friday Chevron Corp. said net income plunged in 3Q2012 by one-third from a year ago on lower production and lower sales prices. The San Ramon, CA-based producer, the second largest oil and gas operator in the United States, earned $5.25 billion net ($2.69/share) versus $7.83 billion ($3.92) in 3Q2011. Revenue dropped to $55.66 billion from $61.26 billion.

Chevron's U.S. production of 637,000 boe/d net in the quarter was down 25,000 boe/d, or 4%, from a year earlier. The decrease was associated with normal field declines, an absence of volumes associated with Cook Inlet, AK, assets sold in 2011, and the effects of storm-related shut-ins from Hurricane Isaac in the GOM. Partially offsetting this decrease was further ramp-up at its Perdido and Caesar/Tonga projects in the GOM.

U.S. natural gas production fell 6% to 1.18 Bcf/d net in 3Q2012, while the liquids component declined by 440,000 boe/d net. Total global production was off 3% year/year to 2.52 million boe/d. Production in the final three months of this year is expected to be higher, which would reflect completed maintenance and restoring GOM operations.

Chevron's U.S. upstream earnings of $1.12 billion in 3Q2012 were down $386 million from a year earlier, primarily because of lower crude oil and natural gas realizations, as well as lower production. Realized U.S. natural gas prices averaged $2.63/Mcf in 3Q2012, versus $4.14 in 3Q2011. U.S. oil and natural gas liquids prices averaged $91/bbl, compared with $97. Outside of the United States, natural gas sold for about $6.03/Mcf, up from $5.50 a year ago, while oil and natural gas liquids prices fell to average $98/bbl from $103.

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