ExxonMobil: “We’re Losing Our Shirts”

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June 27, 2012

NEW YORK–Even energy titan Exxon Mobil Corp. (XOM) is showing signs of strain from low natural gas prices.

On Wednesday Exxon Chief Executive Rex Tillerson broke from the previous company line that it wasn’t being hurt by natural gas prices, admitting that the Irving, Texas-based firm is among those hurting from the price slump.

“We are all losing our shirts today.” Mr. Tillerson said in a talk before the Council on Foreign Relations in New York City. “We’re making no money. It’s all in the red.”

His comments mark a departure from remarks made earlier this year on how lower natural gas prices hadn’t yet hurt the company because of its operational efficie2ncy and low production costs.

The comments from Exxon’s chief come amid a massive U.S. gas supply glut that has kept prices depressed and helped to reduce energy costs for many consumers and businesses. In recent months, demand for natural gas from utilities has surged as firms turn to gas instead of more expensive coal to supply electricity. Just as Mr. Tillerson was speaking, however, natural gas prices rallied to a 5 1/2-month high, with the July contract settling at $2.774 per million British thermal units, the fifth straight day of gains.

Exxon’s $26 billion acquisition of XTO Energy in 2010 made the company the largest producer of natural gas in the U.S.; among U.S. integrated oil companies, it’s the one that’s bet the most on the value of unconventional natural gas production.

Mr. Tillerson said last month during Exxon’s shareholders’ meeting that he had “no regrets” on the timing of the XTO purchase, which occurred just before the most recent slump in U.S. gas prices. At the company’s annual analysts’ meeting in March, Exxon said production costs varied greatly from project to project, but it wasn’t losing money on its natural gas production.

But the executive acknowledged Wednesday that Exxon and most of the industry had “grossly underestimated” the speed of the U.S. natural gas boom, as the technology to unlock gas trapped in shale rock formations, known as hydraulic fracturing, advanced faster than expected.

“It shows even Exxon can feel the pain from low natural gas prices,” said Fadel Gheit, an analyst with Oppenheimer & Co.

In April the company said the average price at which it sold its natural-gas production in the first quarter was $2.74 per million British thermal units, down 20% from the same period a year earlier. That price reflects a combination of spot prices and long-term contracted sales, but analysts expect that figure to drop.

Market prices have averaged about $2.20 per million British thermal units in the second quarter, down from $2.70 in the first quarter, said Guy Baber, an analyst with Simmons & Co. International. Even during the worst days of 2011, prices averaged more than $3.50.

“The message from Tillerson is candid and maybe a bit different than in the past, but I think this is largely because natural gas prices are so much weaker now than they have been,” Mr. Baber said.

That doesn’t mean Exxon Mobil will necessarily stop drilling for natural gas, however.

The company has started to shift its drilling toward sites with greater potential for oil and natural gas liquids, but it has said repeatedly it believes natural gas will grow significantly in the coming decades. The company is designing drilling programs on most of its U.S. gas fields to better assess the long-term prospects of the assets, not capture short term production and revenue gains.

With first-quarter earnings of $9.45 billion and cash reserves of $19.1 billion, Exxon Mobil has the balance sheet and financial strength to be patient and keep drilling gas wells, unlike many smaller oil companies, Mr. Baber said.

In his talk, Mr. Tillerson said energy companies won’t be able to continue drilling unless prices rise.

More recently, Exxon has been studying the possibility of exporting natural gas from the U.S. Gulf Coast and from Canada as shale drilling has unlocked natural-gas reserves to allow exports.

Exxon is following the trend of smaller companies, such as Cheniere Energy Inc. (LNG), that have already pursued the necessary permits to export gas from the U.S.

On Wednesday, he said there are enough U.S. oil and gas reserves to provide the domestic economy with fuel through the rest of the century if public policy encourages the industry.

“To say the U.S. is energy poor is simply not accurate,” Mr. Tillerson said. He added U.S. energy security is “a matter of policy choices” and could be achieved “within the visible future.”

North America has become an important area for the development of new energy resources in recent years, with surging production in both Canada and the U.S. Mr. Tillerson said he was “hopeful” that reforms in Mexico would make possible further collaboration between Exxon and Mexico’s state-owned oil company, Petroleos Mexicanos, or Pemex.

– Jerry A. DiColo, Dow Jones Newswires

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