Please ensure Javascript is enabled for purposes of website accessibility

ExxonMobil Corporation's U.S. Shale Move: Too Little Too Late?

By Arjun Sreekumar – Feb 5, 2014 at 11:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Will ExxonMobil’s recently announced deals in Texas' Permian Basin and Ohio's Utica shale help the company meet its production growth target?

Fresh from its disappointing fourth quarter, which saw fourth-quarter earnings slump 16% year over year as oil and gas production fell 1.8%, ExxonMobil (XOM 0.67%) is eager to tap into the U.S. shale boom in a bid to boost its stagnant production.

On Monday, the company announced it has signed two major deals to expand its position in West Texas' Permian Basin and Ohio's Utica shale through its subsidiary XTO Energy. Will the moves pay off, or is Exxon simply too late to the U.S. shale game?

Exxon's new U.S. shale deals
In the Permian Basin, XTO inked an agreement with Endeavor Energy Resources, L.P., to fund the development of roughly 34,000 gross acres in the play's liquids-rich Wolfcamp formation. As part of the agreement, XTO will gain significant operating equity in the region, bringing its total acreage position in the Permian to just over 1.5 million acres. The company will primarily drill and operate horizontal wells in the play's deeper intervals, while Endeavor will continue to operate in the shallower parts of the play.

In the Utica, XTO inked a separate agreement with American Energy Partners, an upstart oil and gas company led by former Chesapeake Energy CEO Aubrey McClendon, to allow it to drill in up to 30,000 net acres of XTO's acreage in the Utica. XTO will use the proceeds from the transaction to fund 100% of its near-term development costs as it continues to operate in its core Utica acreage of roughly 55,000 net acres.

Though XTO only recently began developing the Utica, the company was encouraged by initial test results, with one of its recent Utica wells producing at a peak 30-day rate of about 15 million cubic feet of dry gas per day. While that's a number to be proud of, it pales in comparison to the play's leading producers. Antero Resources (AR 2.90%), for instance, reported in its fourth-quarter operating update that its five most recently drilled Utica wells had an average 24-hour peak processed rate of 32.2 million cubic feet per day.

Too little too late?
Exxon and many of its big oil peers were admittedly late to the U.S. shale game. And when they did amass stakes in U.S. shale properties, the moves proved ill timed. For instance, Exxon's plunge into U.S. shale with its 2010 acquisition of XTO Energy for $31 billion turned out to be a costly move for the oil giant, as persistently depressed natural gas prices from 2010 to 2013 weighed on profits.

Royal Dutch Shell (RDS.A) similarly waited too long and suffered the consequences when worse-than-expected drilling results and low gas prices forced to company to write down the value of its U.S. shale assets by more than $2 billion in the second quarter of last year.

Now for the important question -- will Exxon's shale deals be enough to achieve its targeted production growth rate of 2%-3% over the next several years? It's tough to say. With Exxon's U.S. oil and gas production accounting for just about a fifth of its global production, output from the Permian and Utica would have to ramp up significantly to have any material impact on companywide production.

Even when combined with other major production growth drivers -- including the Kearl oil sands project in Canada, a liquefied natural gas project in Papua New Guinea, and other projects in Argentina, Russia, and elsewhere -- the Permian and Utica may simply not be enough for Exxon to achieve its target.

Further, the loss of production due to the expiration of a 75-year joint venture contract at its Abu Dhabi oilfields and the reduction of its stake in Iraq's West Qurna 1 field, as well as innumerable risks such as project delays along the way, will make it extremely difficult for Exxon to deliver 2%-3% production growth over the next several years.

The bottom line
Exxon may have simply waited too long to get into the U.S. shale game, missing out on amassing large positions in highly prolific plays such as Texas' Eagle Ford and North Dakota's Bakken shale that have delivered stellar returns for smaller peers. Though the Permian Basin and the Utica are also high-quality plays, they're only a small part of the company's global portfolio.

Despite its operational excellence and unparalleled global footprint, Exxon faces a serious challenge in growing its oil and gas production over the next few years -- the unfortunate consequence of a world where the vast majority of oil and gas reserves have already been depleted or are under the control of foreign governments.

Arjun Sreekumar owns shares of Chesapeake Energy. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.A
ExxonMobil Stock Quote
ExxonMobil
XOM
$110.54 (0.67%) $0.73
Chesapeake Energy Stock Quote
Chesapeake Energy
CHKA.Q
Antero Resources Stock Quote
Antero Resources
AR
$36.93 (2.90%) $1.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.