ExxonMobil's (XOM -2.78%) fourth-quarter financial results highlighted the oil giant's continued struggle with boosting oil and gas production, which fell 1.8% from the year-earlier quarter. Though the company has a number of major projects slated to start up over the next few years, will they be enough to deliver the 2%-3% annual production growth the company is targeting?
Why Exxon's production fell
Despite spending a record $42.5 billion on exploration and other capital projects last year, Exxon's fourth-quarter upstream earnings declined by 13%, or $976 million, to $6.8 billion, while companywide earnings fell 16% year over year to $8.4 billion, or $1.91 a share, down from $10 billion, or $2.20 a share, a year earlier.
The company cited lower-than-expected output from its operations in Canada and Kazakhstan as two of the main factors behind the decline in its oil and gas production. Equipment issues prevented the company's Kearl oil sands project in Canada from reaching its full capacity of 110,000 barrels per day, while operations in Kazakhstan were delayed by a pipeline leak.
These issues highlight how even a company like Exxon -- known for its superior capital allocation, peer-leading capital efficiency, and expert project management capabilities -- isn't immune from project delays. And given that the company plans to continue spending on riskier, technically complex projects around the world over the next five years, delays and other unexpected interruptions could continue weighing on production.
Can Exxon boost production?
Still, Exxon is confident that it can boost its oil and gas output and is targeting 2%-3% annual production growth over the next few years. In its fourth-quarter earnings conference call, management touted the Kearl oil sands project, whose expansion is now more than 70% complete, and a liquefied natural gas project in Papua New Guinea, which will start up shortly, as key drivers of output growth.
Operations in the U.S., where the company plans to add more rigs in Texas' Permian basin and continue developing fields in North Dakota and Oklahoma, as well as unconventional opportunities in Argentina, Russia, and Tanzania are also expected to contribute to production growth. But despite Exxon's optimism, there are a few reasons to be skeptical.
Firstly, the company will lose a meaningful amount of production in the United Arab Emirates, estimated at approximately 150,000 barrels per day annually, after its joint venture contract to drill in Abu Dhabi's onshore oilfields ends this month. BP (BP -1.80%), Royal Dutch Shell (RDS.A), and Total (TTE 0.59%), which each also hold a 9.5% interest in the company developing Abu Dhabi's oilfields, will also be equally affected.
Secondly, the reduction in gas production at the Netherlands' Groningen field, Western Europe's largest gas field, due to concerns that gas development is causing tremors will also weigh on Exxon's output. Exxon, which operates the field through a 50/50 joint venture with Shell, will see annual production at Groningen fall from 53.8 billion cubic meters, or bcm, last year to around 42.5 bcm this year and next.
Lastly, Exxon's recent decision to sell a 25% stake in Iraq's West Qurna 1 field to PetroChina (PTR), China's largest oil and gas producer, will also reduce its oil production. Given that the field is producing as many as 600,000 barrels of oil per day, Exxon's net production will be cut from 360,000 boe/d to 210,000 boe/d, as its stake in the field falls from 60% to 35%.
The bottom line
As you can see, even for a company that is as well managed as Exxon, boosting its oil and gas production will be a continuing challenge, especially given the execution risk associated with new capital-intensive and technically complex projects. At the same time, however, the company's investments in long-lived projects such as Kearl and its various LNG projects throughout the world should help reduce decline rates and provide a stable base of production.
Given Exxon's consistency in generating peer-leading returns on invested capital and its extensive investments in LNG -- an area primed for rapid growth over the next decade -- I think Exxon is still a reasonably attractive company to hold over the long term. Furthermore, despite the sharp rise in its share price over the past few months largely because of Warren Buffett's revelation of a major stake in the company, shares are still trading at roughly 12.4 times forward earnings -- significantly lower than their long-run average of 15.6 times over the period 1995-2013.