We are reiterating a Neutral recommendation on ExxonMobil Corporation (XOM) following its strong fourth-quarter 2010 results and rewarding capital budget program. However, the company’s low production volume expectation for 2011 keeps us on the sidelines.
ExxonMobil’s improved production and increased oil price realizations led to a 53% improvement in earnings last quarter to reach $9.25 billion on a year-over-year basis. Upstream earnings were about 29% higher from the year-earlier quarter at $7.48 billion.
Total production, which increased significantly in the fourth quarter of 2010, is expected to improve further next year through the joint venture agreement with Qatar Petroleum to progress with the Barzan Project. We foresee further expansion over the next several years through traction in hydrocarbon exploration in unconventional areas outside the U.S.
Given ExxonMobil’s significant share in the upstream business (accounting for roughly 81% of fourth quarter 2010 net income), we believe it will retain its leverage to higher oil prices going forward. Further, political unrest in the Middle East and North Africa has prompted oil companies to remain optimistic on a solid rebound in prices. The company also expects global energy demand to grow 35% by 2030 from the 2005 level.
The world’s largest publicly traded oil company, ExxonMobil is fairly active in its investment program, which is reflected by a $34 billion capital expenditure budget for 2011 (up 5.6% year over year). It reflects the company’s focus to expand the production level through its major projects comprising the oilsands venture in Canada, natural-gas endeavors in the U.S. and the Middle East, as well as oil exploration overseas.
Notably, the company said that 80% of its forthcoming production is expected to be crude oil over the next five years. Exxon’s competitors, Chevron Corp. (CVX) and ConocoPhillips (COP), also intend to allocate their investment primarily on oil-weighted projects this year.
However, we remain disappointed by the company’s relatively low 2011 production growth guidance of 3% to 4% year over year. Particularly, after the full-year contribution from the XTO acquisition, a lower guidance for 2011 implies an equivalent drop in organic development. Moreover, although ExxonMobil replaced over 100% of its proved reserves in 2010, this depended largely on XTO volumes. On an organic basis, its replacement rate was only 45%.
ExxonMobil currently holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.
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