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ExxonMobil's Production Profile Promises Hefty Payday

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ExxonMobil (NYSE: XOM  ) delivered its fourth-quarter 2013 results in late January. While earnings increased sequentially from $7.9 billion in Q3 to $8.4 billion in Q4, investors remained widely pessimistic about the slip in ExxonMobil's upstream volumes, which decreased 1.8%. This was in part driven by its high exposure to natural gas, which makes up 47% of total production.

Despite natural gas prices rising during the prevailing cold season, continually low gas prices have made the incentive to produce natural gas painfully low, impacting ExxonMobil's upstream volumes -- prices must be reasonably high to accommodate the cost of production and still deliver a fair profit margin.

The natural gas volumes that ExxonMobil produces continue to weigh on its stock. Year to date it has lost close to 10%. However, this may change once natural gas prices adjust to the actual realities on the ground.

More control over pricing mechanisms
Ongoing cold weather in the Northeast continues to drive the demand for natural gas. March delivery for natural gas hit $5.58 per million Btu (MMBtu) in early trading on Feb. 5, a price not seen since early 2010.

In the near term, the price may slip -- it won't be cold forever. In fact, April futures prices are down to about $4.60/MMBtu, below the $5 sweet spot that makes it attractive to pursue natural gas. In the long term, however, oil players, including ExxonMobil, will have more control over natural gas pricing mechanisms, presenting an incredible opportunity.

Since 2005, the five highest days of natural gas consumption all occurred in January of this year. This has greatly affected storage levels. Just to put this into clearer perspective, storage levels are 22.5% below where they were a year ago and 16.6% off the five-year average.

ExxonMobil is an integrated oil major -- it's exposed to upstream, midstream, and downstream operations. This means that it cannot only control its own natural gas storage by rationing supply, but it can also exert its towering influence in the midstream sector to push other midstream players to follow suit.

Current low storage levels firmly place the gavel in ExxonMobil's hands. Due to the aforementioned influence in the midstream sector, ExxonMobil has the ability to play simple economics of scarcity to influence demand and in effect impact natural gas prices. This may come into clearer focus in the near term, as low storage levels present an opportunity to hold onto supplies and beat the market-pricing mechanisms.

While this is not essentially a game changer -- regulators and consumers groups won't give ExxonMobil the time of day -- it gives ExxonMobil momentary power to increase natural gas prices, presenting a chance to reverse the slowdown in the upstream business in the near term. This should be reflected in its stock going forward.

More involvement in natural gas value chain = higher prices
While directly controlling price mechanisms is subject to much debate and sharp criticism from consumer groups and regulators, a long-term solution for low natural gas prices is in the offing.

The gaping lack of infrastructure in the midstream sector will have a more far-reaching and permanent impact on natural gas prices. The deficit in midstream infrastructure is something that I have extensively deliberated upon, including previously pointing out that 35% of Bakken natural gas production is flared -- burned at the well -- due to lack of infrastructure to store and transport it. This runs into $100 million each month.

Going forward, midstream sector players will move in to capitalize on the demand for infrastructure, ExxonMobil included. Naturally, this requires heavy capital investments. Since 2008, 95% of midstream companies' expenditures and acquisitions have been funded externally through equity and debt, according to a report by the Deloitte Center for Energy Solutions. This is likely to remain unchanged in the face of huge demand for infrastructure.

This means that midstream companies will be chasing higher returns in order to reward suppliers of external capital -- higher interest payouts for debt instruments and more dividends for equity. Naturally, the pursuit of greater returns will be priced into the entire oil value chain, putting reasonable upward pressure on natural gas prices in the long term.

Natural gas prices will increase in the long term. The current swings are simply a small caption in an otherwise long-stretching upward curve. Moving forward, ExxonMobil will make solid returns on its high exposure to natural gas (47% of production portfolio). In consideration of this, ExxonMobil is currently trading at a great discount. Investors should make use of the opportunity.

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Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2014, at 4:16 PM, rickshelton53 wrote:

    They will not be making any profits from me and my family Nor will the propane companies either i have never had a need for their services at any point in my life ,,I have to admit Gasoline did effect our farm profits for a couple of years instead of running beef cattle we stop that and went to grass and seed and we sale on the 1/2's shares of the total profit for the years growth .. and we raise our own beef and don't buy meat from any super Markets ... We have had our farm for 3 generations and own it out right 800 ac's of cleared grass land and 300 ac's of wooded timber so we burn wood for winter heat at no cost to us ,,We grow a big family Garden Buy very little veggies

  • Report this Comment On February 10, 2014, at 4:21 PM, rickshelton53 wrote:

    If a person owned their home and land as my family has ,, No car payments .. No house payments... Makes life so much better...

  • Report this Comment On February 10, 2014, at 4:29 PM, rickshelton53 wrote:

    These companies have so many people over a barrel that have to use there services ,, So they charge what they want to and no one can do nothing bout it ,,I'm so glad im not dependent on these mongrels ....

  • Report this Comment On February 10, 2014, at 10:08 PM, Freddyfreebe1 wrote:

    Hell it doesn't take much to see the future of natural gas not being in your future. Big Oil, did the same thing with there over priced gasoline. Propane as become the biggest scam since gasoline. How many time you have to be kicked in the teeth before you understand Big oil and Gas will bankrupt you and may even kill your water supply. You kids will pay more for drinking water then you are paying for this trash fuel.

  • Report this Comment On February 11, 2014, at 10:57 PM, quasimodo007 wrote:

    they Represent the Evil GOp congress and their Mafia style Greedy Privilege Crooks of wall street who Motto is Do THE GREAT Americans RIP OFF on Americans Consumers

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Lennox Yieke

Lennox Yieke is a business writer who has a knack for not only seeing first what others see eventually, but telling the story from an entirely fresh, interesting, informed and ‘Foolish’ perspective. Join him as he covers energy, materials and utility stocks, breaking down mind-boggling numbers and loads of jargon into tidbits of understandable, valuable investing guidance. Always feel free to engage with him and share your latest ideas on Twitter @lyieke

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8/27/2015 4:00 PM
XOM $74.85 Up +2.35 +3.24%
ExxonMobil Corp CAPS Rating: ****