Exxon Mobil Corporation (XOM) Q3 2013 Earnings Call October 31, 2013 11:00 AM ET
David Rosenthal – VP, IR
Evan Calio – Morgan Stanley
Douglas Terreson – ISI Group Inc.
Doug Leggate – Bank of America Merrill Lynch
Edward Kelly – Credit Suisse
Paul Sankey – Deutsche Bank
Blake Fernandez – Howard Weil
Jason Gammel – Macquarie
Asit Sen – Cowen & Company
Faisal Khan – Citi
Roger Read – Wells Fargo
John Hurling – Societe Generale
Allen Good – Morningstar
Pablo Mockonoff – Raymond James
Katherine Minyard – JPMorgan
Paul Cheng – Barclays
Good day, and welcome to this Exxon Mobil Corporation Third Quarter 2013 Earnings Conference Call. Today’s call is being recorded. And at this time for opening remarks, I would like to turn the call over to the Vice President of Investor Relations and Secretary, Mr. David Rosenthal. Please go ahead, sir.
Good morning, and welcome to Exxon Mobil’s third quarter earnings call and webcast. The focus of this call is Exxon Mobil’s financial and operating results for the third quarter of 2013. I will refer to the slides that are available through the Investors section of our website.
Before we go further I would like to draw your attention to our cautionary statement shown on slide two.
Moving to slide three, we provide an overview of some of the external factors impacting our results. Global economic growth remained constrained in the third quarter with mixed performance across the region. The U.S. economy continues to grow at a moderate pace, following an upward revision of second quarter growth.
China’s growth improved modestly while European economies remain uncertain. Energy markets delivered mixed results compared to the second quarter with higher crude oil and lower natural gas prices Global industry refining margins deteriorated significantly reflecting moderate demand and improved capacity availability. Chemical commodity product margins strengthened during the quarter on lower feedstock costs and increased U.S. demand.
Turning now to the third quarter financial results as shown on slide four. Exxon Mobil’s third quarter earnings were $7.9 billion or a $1.79 per share. The corporation distributed $5.8 billion to shareholders in the third quarter through dividends and share purchases to reduce shares outstanding. Of that total $3 billion was used to purchase shares.
CapEx in the third quarter was $10.5 billion and $32.6 billion for the first nine months of 2013 in-line with anticipated spending plans. Cash flow from operations and asset sales was $13.6 billion. At the end of the third quarter cash totaled $5.7 billion and debt was $21.3 billion.
The next slide provides additional detail on third quarter sources and uses of funds. Over the quarter cash increased from $5 billion to $5.7 billion. Earnings, depreciation expense, changes in working capital and other items and our ongoing asset management program yielded $13.6 billion of cash flow from operations and asset sales.
Uses included additions to plant, property and equipment of $9.1 billion and shareholder distributions of $5.8 billion. Additional financing and investing activities increased cash by $2 billion. Share purchases to reduce shares outstanding are expected to be $3 billion in the fourth quarter.
Moving on to slide six and a review of our segmented results. Exxon Mobil’s third quarter earnings of $7.9 billion decreased $1.7 billion from the third quarter of 2012. Lower downstream earnings were partly offset by higher upstream and chemical earnings.
In the sequential quarter comparison shown on slide seven earnings increased by about $1 billion across all segments, reflecting higher upstream realizations, lower refining maintenance, improved chemical commodity margins and lower corporate and financing expenses. Guidance for corporate and financing expenses remains at $500 million to $700 million per quarter.
Turning now to the upstream financial and operating results and starting on slide eight. Upstream earnings in the third quarter were $6.7 billion, up $740 million from the third quarter of 2012. Stronger prices increased earnings by $440 million as worldwide crude oil and natural gas realizations increased by $2.85 per barrel and $0.56 per 1,000 cubic feet respectively.
Reduction volume and mix effects increased earnings by a net $20 million, as the benefit from higher liquid volumes was mostly offset by the impact of crude under lifts and lower natural gas production. All other items, mainly favorable tax and foreign exchange impacts increased earnings by $280 million. Upstream after tax earnings per barrel for the third quarter were $18.16.
Moving to slide nine, production increased by 58,000 oil equivalent barrels per day or 1.5% from the third quarter of last year. Liquids production was up $83,000 barrels per day or 3.9%. Lower downtime, mainly in Nigeria, the U.S. Kazakhstan and Canada ramped up at the Kearl and Nigeria Satellite projects and continued increased production from liquids rich unconventional plays in the U.S. were partly offset by field decline.
Natural gas production was down 147 million cubic feet per day. As expected lower U.S. production and field decline in several areas were partially offset by lower downtime, mainly in Qatar and project ramp-ups.
Turning now to the sequential comparison starting on slide 10, upstream earnings increased by $408 million versus the second quarter. Realizations increased earnings by $410 million as worldwide crude prices increased $7.67 per barrel and natural gas realizations decreased $0.53 per 1,000 cubic feet. Volume and mix effects decreased earnings by $150 million as increased liquids production was more than offset by the impact of under lift in a number of regions including the North Sea and West Africa and by lower natural gas production in Europe.
Other items had a positive impact of a $150 million, primarily reflecting the absence of exploration cost reimbursement to Rosneft in the second quarter.
Moving to slide 11, oil equivalent volumes were down 1.4% sequentially. Liquids production increased 17,000 barrels per day, mainly due to project ramp-ups in Canada and Nigeria and lower overall down time partly, offset by field decline. Natural gas production was down 440 million cubic feet per day sequentially. Lower seasonal demand in Europe and field decline were partially offset by lower down time in Qatar.
Our year-to-date production volume performance continues to be in line with the projection presented at the analyst meeting in March with strong up time performance increased North American unconventional liquids production and higher European gas demand for the year offsetting the slower than anticipated ramp up of Kearl. We remain on target to meet the 2013 volume outlook presented at the analyst meeting.
Moving now to the downstream financial and operating results starting on slide 12. Downstream earnings for the quarter were $592 million, down $2.6 billion from the third quarter of 2012 due to lower global refining margins of almost $2.4 billion. Volume and mix effects increased earnings by a $150 million, driven by lower refining maintenance. Other items reduced earnings by $380 million including the absence of gains from the Switzerland investment.
Turning to slide 13 sequentially third quarter downstream earnings increased by $196 million. Lower global refining margins decreased earnings by $870 million while volume and mix effects increased earnings by $500 million, reflecting reduced maintenance activity. Other items increased earnings by $570 million primarily due to the absence of the Dartmouth Refinery conversion costs, lower maintenance expenses and favorable foreign exchange impacts.
Moving now to the chemical, financial and operating results and starting on slide 14. Third quarter chemical earnings were just over a $1 billion, up $235 million versus the prior year quarter due mainly to stronger margins from higher commodity realizations in all regions.
Moving to slide 15 sequentially chemical earnings increased by $269 million. Improved commodity margins helped by favorable feed cost in the U.S. increased earnings by a $110 million. Strong U.S. commodity sales volumes further increased earnings by $60 million. Lower cost associated with Singapore’s new steam cracker start up and lower plant maintenance favorably impacted earnings by a $100 million.
Moving next to the third quarter business highlights, beginning on slide 16th. The next two slides provide an update on upstream projects which recently started or will start production next year. Beginning with the 2013 project start-ups; at Kearl we are currently producing at or above 100,000 barrels per day. Over the past few months we have undertaken normal start-up related fine tuning and synchronization activities of our facilities, which are not unusual for our new operations of this scale and magnitude.
Kearl incorporates a number of technology innovations such as our proprietary froth treatment process which significantly enhance environmental and reduce capital investment. Successful application of this new technology was confirmed as Kearl bitumen is now being processed at a number of Exxon Mobil and third party refineries.
The Kearl expansion project is on budget, on schedule and now nearly 60% complete. Fabrication and assembly of pipe rack and equipment modules for the bitumen processing plant are progressing in Edmonton and are 80% complete. Learnings from the initial development are being applied to the construction and commissioning of the expansion project.
On the logistics side Enbridge initiated construction of the Woodland mainland pipeline which will extend 385 kilometers South of Cheecham to the Edmonton terminal and connect with refineries and export pipeline. This new pipeline will have an initial capacity of 400,000 barrels per day with the ability to expand to approximately 800,000 barrels per day depending on crude viscosity.
The Kipper-Tuna Turrum project in Australia has started with gas production from the Tuna Field via two new gas pipelines and first oil production from the Turrum Field through the new Marlin B platform. This project represents the largest new domestic oil and gas development on the Australian eastern seaboard.
With reserves of 1.6 trillion cubic feet of gas and 140 million barrels of recoverable oil and gas liquids. Kipper-Tuna Turrum will help secure East Australia’s energy future.
First production from Kashagan was achieved in September and production ramped up to near 80,000 barrels per day. In late September again and earlier this month traces of gas were detected along the onshore gas pipeline route from one of the production and drilling islands to the onshore processing facility.
The operator is currently investigating the root cause of the events and it is now anticipated that inspection and investigation will take some weeks to conclude. Production will remain shut-in until this work is complete.
Turning now to slide 17 and an update on some of our projects scheduled to start-up in 2014. The PNG LNG project is now more than 90% complete. We achieved several important milestones during the quarter including completion of drilling at the first well pad and starting the commissioning phase at the LNG plant in preparation of production startup in the second half of 2014.
The plant has now been pressured up with gas to initiate power generation and enable testing of key facilities and equipment. The estimated cost of the project remains at $19 billion, reflecting disciplined project management and a unique and challenging work environment.
The Cold Lake Nabiye development Canada is 60% complete and progressing per plan towards a 2014 startup. This is another long plateau development which will access or resource 280 million barrels of oil and produce an additional 40,000 barrels of bitumen per day.
The Nabiye project includes a new steam plant, field production pads and associated facilities. Equipment installation is well underway and six of the seven initially planned drilling pads for 24 wells each have been completed to-date.
Moving next to Qatar, the Barzan project is another major step in our long and successful relationship with Qatar Petroleum. All of the 30 production wells are now complete and the well head platform top sides have been installed. Start-up is planned for late next year. When completed, the project will provide gas to the State of Qatar to meet the country’s growing need for clean burning natural gas.
The first phase of the project is to supply about 1.4 billion cubic feet of gas per day together with the sale of associated condensate LPGs and ethane.
Also in Qatar the Helium 2 plant project operated by RasGas started up during the quarter. The plant is expected to produce approximately 1.3 billion cubic feet per year when fully operational. The Helium 2 plant is the world’s largest helium refining facility and makes Qatar the largest exporter and second largest producer of helium in the world.
As Qatar continues to reliably supply international markets with LNG, extracting helium from the produced gases is a profitable, value added activity which helps meet the world’s ever growing demand for liquid helium.
Turning now to slide 18 and an update on our progress in Russia, I will start by highlighting another milestone in the successful Sakhalin-1 development. The consortium marked 10 years of drilling success pioneering the industry’s extended reach drilling technologies while leveraging Exxon Mobil’s 90-year history of Arctic expertise.
Since 2007 a number of world records in extended reach drilling have been set by the Sakhalin Yastreb rig at the Chayvo and Odoptu fields. Today 23 of the 30 world’s longest extended reach wells are Sakhalin 1 wells. The current world record is held by a Sakhalin 1 well which was drilled at the Chayvo field earlier this summer to a length of 12,700 meters. Exxon Mobil’s proprietary technology has minimized drilling vibration and improve overall economic efficiency while reducing the environmental footprint of the Sakhalin-1 project.
Drilling with emphasis on safety, flawless execution and implementation of unique drilling technologies have made Sakhalin 1 a premier project in the global oil and gas industry.
Now turning to our Arkutun Dagi, this will be the largest offshore oil and gas production platform in Russia making the Sakhalin shelf a model for Arctic and sub-Arctic project developments. Construction of the top sides was completed in Korea earlier this year and commissioning of the drilling rig and top side facilities are 40% complete.
Installation of the top sides onto the gravity based structure next year will set a new world record for float over installation offshore at 42,000 tons. Start-up is planned by the end of next year and production will peak at around 90,000 barrels per day.
In West Siberia, operations for the pilot program are underway. Instead of drilling new wells we entered and deepened existing well bores which has sped up the process to acquire the new petro-physical log data and for samples. This information will help identify key produce ability parameters for the [Baginov] and help optimize new horizontal drilling locations planned for 2014.
In preparation for exploration drilling in the Kara Sea the Rosneft ExxonMobil joint venture recently completed a month long ice defense field trial to test CIs and Iceberg tracking in systems that will be used to protect the drilling rig. All operations were successful and completed safely. ExxonMobil’s Arctic leadership and continued successful execution of Sakhalin 1 positions us well as we prepare to ramp up the exploration program in the Kara Sea in 2014.
Also in the Black Sea, site surveys were completed in preparation for drilling to begin in late 2014 or early 2015.
Turning now to slide 19, and an update on our global and broad exploration program. In September, drilling started on the Mronge 1 Wild Cat in Block 2 Offshore Tanzania. The Mronge 1 well targets reservoirs equivalent in age to those successfully tested by the Zafrani and [Lavani] wells. In addition to another reservoir interval previously untested in Block 2. Further wildcat drilling is planned for 2014.
In Argentina, Exxon Mobil spud the first operated well on the Bajo del Choique block targeting the Vaca Muerta formation. This is the first of three Exxon Mobil operated wells that will be drilled in sequence on the block.
In Canada, Exxon Mobil in partnership with Imperial Oil acquired ConocoPhillips’ Interest in Clyden oil sands lease. The Clyden Lease is near Imperial’s corner lease holding and contains 226,000 gross acres of high quality oil sands amenable to the steam assisted gravity drainage or SAGD in-situ recovery technique.
Turning to Brazil. Exxon Mobil was awarded the interest it successfully in bid for in May. Exxon Mobil required a 50% interest in the Potiguar Block and a 50% interest in the CR603 block totaling more than 750,000 gross acres offshore North Eastern Brazil. Exxon Mobil will be the operator for both blocks.
In Gabon, Exxon Mobil has reached agreement to acquire a 30% participating interest in the offshore Arouwe Block, the operator Perenco along with the third party equity holder Tolo is planning a wildcat well in 2014.
Turning now to slide 20 and an update on our North American liquids activity. In the Permian Basin, we are ramping up activities to develop both conventional and unconventional reservoirs across our leading position of 1.5 million net acres. We currently have eight operated rigs and have turned almost 100 wells to sales this year across the entire basin. Current net production is more than 90,000 barrels per day.
More than 65 work over rigs are also active on our Permian properties increasing production by opening additional zones and performing fracture stimulation treatments. We are also optimizing development and expanding infrastructure in our CO2 projects in the Central Basin platform area in order to enhance oil recovery.
We also continue to actively evaluate unconventional potential across our Permian acreage highlighted by the Wolfcamp, Wolfbone, Wolfberry and Bone Springs reservoirs.
In the Bakken play our gross operated production recently hit a record 65,000 oil equivalent barrels per day. For the quarter oil equivalent production increased by 81% over the prior year quarter driven by a record 85 wells turned to sales year-to-date and the 2012 Danbury transaction. This volume increase reflects the benefits of well pad development drilling and optimized well completions across our core Bakken acreage.
In the Woodford well reserves continue to be strong with peak 30 day equivalent production rates up 17% year-to-date. For example a recent five well pad competition had a peak seven day production rate just below 4,000 barrels of oil and 13 million cubic feet of gas per day. We also continue to develop infrastructure for our growing liquids production, recently putting in service a 65 mile oil gathering pipeline in the Ardmore area.
In conclusion, in the third quarter we earned $7.9 billion, generated $13.6 billion in cash flow, invested $10.5 billion in cash flow, invested $10.5 billion in the business and distributed $5.8 billion to our shareholders. Business performance remains strong across our portfolio. In the upstream we increased liquids production from project ramp ups and lower downtime. Total production volumes are on target to meet the full year outlook provided at the analyst meeting.
In the downstream refinery throughput increased upon successful completion of the significant plant maintenance activities in the second quarter. Chemical business results remain strong on increased commodity product demand and lower feedstock cost. Across the corporation CapEx is in-line with anticipated spending plans. Our cash flow remains strong and enables robust shareholder distribution.
We maintain a long-term perspective on our business with a relentless focus on operational excellence and disciplined investing through the business cycle. As discussed in the business highlights we continue to progress a unique and diversified set of profitable growth opportunities which position us well to deliver long-term shareholder value.
That concludes my prepared remarks and I would now be happy to take your questions.
Earnings Call Part 2: