Over the past few years, ExxonMobil's (NYSE: XOM) investors have started to get a little concerned with the company's oil and gas production. Or, more specifically, a lack of production growth. Exxon has been known for decades as the steady ship in the stormy sea that invests rather consistently through the ups and downs of the commodity cycle. After a couple of years of belt tightening, though, its project portfolio did look a little leaner than it had in the past.
This past quarter, though, management went out of its way to highlight two parts of its portfolio that should help quell those fears of production decline rather quickly. Here are a few quotes from ExxonMobil's most recent conference call and some background on why these two projects are so monumental for ExxonMobil.
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Stepping on the gas in Guyana
There has been a lot of chatter lately about ExxonMobil's oil discoveries off the coast of Suriname and Guyana. It wasn't that long ago that the company announced a significant oil reservoir there. Whatever oil it found, it looks like it was a good one, because it moved to the front of Exxon's project line to get the green light. Here's Vice President Jeff Woodbury giving the details of the final investment decision.
The numbers for this project are absolutely incredible. The only way to realize the strides Exxon made with this project is to compare it to other well-known projects. Let's take BP's (NYSE: BP) Mad Dog Phase 2 project as an example. This is a field BP discovered in 1998 and deployed its first phase in 2005. This phase 2 plan has already gone back to the drawing board multiple times and will now cost $9 billion for a 140,000 barrel per day increase in production that will start up in 2021.
Think about that. Mad Dog is a project in one of the most well known offshore hydrocarbon reservoirs in the world with access to the Gulf's immense pipeline and manufacturing centers. This Liza project is in a brand new reservoir with no infrastructure in place, and ExxonMobil says it can develop it for half the cost and one year faster.
Even more potential ahead
Here's the more incredible part of this discovery. The Liza production project could just be scratching the surface of what is there. Here's Woodbury describing what ExxonMobil has done thus far and how much more potential this region could have.
All of those discoveries and drilling that the company has completed thus far are only a small part of ExxonMobil's license, though. This map that accompanied Woodbury's remarks shows where ExxonMobil has drilled thus far and how much more acreage the company has.
I have to point out that Exxon compares the size of this block to a standard U.S. Gulf of Mexico block. It just goes to show that this block could be a game changer for ExxonMobil. It's not that often you can say that when you consider ExxonMobil's size.
Powering up in the Permian
ExxonMobil and other integrated oil and gas companies caught a lot of flack in the early innings of the North American shale revolution. Analysts were quick to point out that independent oil and gas companies were running circles around the big guys posting eye-popping production growth levels and a willingness to spend big.
Here's the problem with this assessment; it assumes that these two types of companies had the same objectives and time scales. Most of these independents bet the farm on shale development and had to put up big production growth numbers at the expense of their balance sheet. They routinely outspent their cash generating abilities for pedestrian rates of return.
All that time, ExxonMobil took the same approach it always has used with reservoirs. It took its time to understand the reservoir and its drilling program was more based on learning than having to put up production numbers.
Thanks to this approach, Exxon was able to crack the code of its holdings in the Deleware Basin -- part of the larger Permian Basin -- and can now deliver fantastic returns on that production. Here's Woodbury describing Exxon's Permian expansion plans from here.
Later on in the call, Woodbury said that the long-term plan for the Permian was to increase production to 350,000 barrels per day. By taking a more methodical approach, the company now has a production source that costs less than $10 a barrel to develop and can represent close to 10% of its entire production portfolio.
What a Fool believes
ExxonMobil's production levels have been flat or declining as of late without several new project deliveries on the horizon to offset those declines. These two areas, though, give ExxonMobil immense new resources at extremely favorable economics. It's hard to find an offshore project that expects to have a better than 10% discounted cash flow return with oil at $40 a barrel, and development costs for shale in the single digits are great. Throw in some huge LNG projects in the U.S. Gulf Coast, Papua New Guinea, and Mozambique, and you have an astounding growth profile over the next few years that can thrive at today's oil prices.
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