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Canada Holds the Key to ExxonMobil's Production Growth

By Bob Ciura - Mar 13, 2014 at 12:59PM

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After a year of falling production and amid renewed capital discipline, ExxonMobil is banking on its Kearl project in the Canadian oil sands.

Energy giant ExxonMobil ( XOM 0.29% ) is in a tough spot. It saw production drop last year, as field declines offset project ramp-ups. The downstream side of the business performed even worse. Profit margins on refined product sales shrank significantly between West Texas Intermediate crude and the international benchmark, which brought down refining profits across the industry. As a result, the pressure is on to turn things around this year.

In its downstream business, ExxonMobil sees some improvement in global refining conditions but isn't banking on a complete recovery in 2014. Consequently, the impetus is clearly on ExxonMobil's upstream segment for improved results this year. That will be difficult, since ExxonMobil is cutting capital expenditures, meaning its existing projects become all that much more important. One such project lies in the Canadian oil sands, and perhaps represents the company's best chance at getting upstream production going again.

Integrated majors doing more with less
ExxonMobil needs to be extremely efficient in its existing operations if it's going to reverse the production decline from last year. That's because it's about to trim capital spending in 2014, to $39.8 billion, down from $42.5 billion spent last year. This is a recurring theme throughout the integrated oil and gas space, as majors such as ExxonMobil and close peer Chevron ( CVX 0.45% ) are embarking on a path of financial discipline.

Like its larger counterpart, Chevron is allocating $39.8 billion to capital expenditures this year, down from $42 billion spent last year. Chevron management has stated that last year would represent a peak year of aggressive acquisitions, and that it would tighten its financial belt in 2014 to focus on bringing its recent investments on-line.

ExxonMobil is adopting a similar approach. This means ExxonMobil won't be nearly as aggressive in acquiring new assets for exploration and production, and as such, there's considerable pressure on the company to execute on its existing projects. Perhaps the biggest one is the Kearl project in the Canadian oil sands.

A U.S. energy giant heads north

The Kearl project is comprised mostly of diluted bitumen, and is a joint venture between ExxonMobil and operator Imperial Oil ( IMO 0.03% ). It's a massive undertaking that will be connected to the substantial North American pipeline system. The logistics are extremely favorable, since resources developed will be transported directly to refineries that are specifically able to handle heavy oil and bitumen.

The field is strategically located in one of the highest-producing areas of the Canadian oil sands, which holds 97% of Canada's proved oil reserves according to the U.S. Energy Information Administration. Not surprisingly, ExxonMobil believes there's a huge amount of potential from the Kearl project.

ExxonMobil began first production from Kearl in April last year, at an initial level of 110,000 barrels of oil equivalents per day. This is already benefiting ExxonMobil. Production in its combined Canada and South America division grew from 273,000 barrels per day in the third quarter last year to 320,000 barrels per day in the fourth quarter. That represents 17% production growth on a quarter-over-quarter basis.

Going forward, even more benefits will be realized. ExxonMobil expects production to double from initial levels by late 2015, and the company estimates Kearl production to hit 500,000 barrels per day at full development. That would represent one out of every eight barrels of oil in Canada at current production rates.

The Foolish bottom line
ExxonMobil saw production fall 1.5% in 2013, and poor performance in its downstream operations resulted in collapsing profits last year. In light of management's decision to trim spending in 2014, you'd think the company faces a difficult prospect in getting its upstream production going in the right direction this year. However, ExxonMobil is about to significantly ramp-up production at its massive Kearl project in the Canadian oil sands.

Production capacity at Kearl is truly amazing, and ExxonMobil will reap considerable efficiencies through the transportation of produced bitumen directly to refineries specifically configured for it. As a result, investors should remain optimistic about ExxonMobi's future production potential.

OPEC's worst nightmare is heavily reliant on greater CapEx spending

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$62.45 (0.29%) $0.18
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$118.45 (0.45%) $0.53
Imperial Oil Limited Stock Quote
Imperial Oil Limited
IMO
$35.20 (0.03%) $0.01

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