- Exxon is investing significantly in LNG projects which demonstrate its belief in the increasing long-term demand for LNG.
- LNG demand will rise 1.9% a year through 2040, more than double the rate for crude oil.
- Oil and LNG prices are poised to increase significantly, which will drive Exxon's earnings, causing a rise in its stock price.
Despite falling prices, Exxon Mobil Corporation (NYSE:XOM), the world’s largest publicly traded international oil and gas company, believes in the long-term increasing demand for liquefied natural gas (LNG). Right now, there is an oversupply of LNG, as new LNG export terminals have come online, which has caused its price to fall sharply. Prices are expected to remain depressed, and some companies are canceling new LNG projects. The change in the price of LNG in different countries in the last year is shown in the table below.
However, Exxon sees robust demand for LNG over the long-term, and it is investing significant capital in new projects. According to OilPrice.com, Exxon spent between $2.3 and $3.6 billion for InterOil’s natural gas assets in Papua New Guinea in July, which can be viewed as a long-term bet on LNG. Moreover, Bloomberg reported that Exxon is also in talks to purchase gas assets in Mozambique. Both moves demonstrate Exxon's belief in the growing demand for LNG in the coming years. Exxon's internal projections are that LNG demand will rise 1.6% a year through 2040, more than double the rate for crude oil. However, while Exxon's internal projections, which is used for the company's investments, is for increasing LNG demand by 1.6% a year, U.S. Energy Information Administration expects even higher growing demand at 1.9% a year.
Natural gas has the significant advantage that it is a low carbon-emitting fossil fuel. According to the EIA, natural gas emits 117 pounds of CO2 per million British thermal units (Btu) of energy, compared to 228.6 pounds for coal, and 157.2 pounds for gasoline. In my view, this is a major factor which will increase demand for LNG in the coming years; LNG is a way to move natural gas over long distances when pipeline transport is not practicable. According to EIA, Because LNG is more energy dense than gaseous natural gas, there is increasing interest in using LNG as a fuel for heavy-duty vehicles and other transportation applications, which could also increase the demand for LNG.
Natural gas accounts for a significant part of Exxon's upstream production. In the first six months of 2016, natural gas accounted for 41.2% of the total oil-equivalent production. The company produced during this period an average of 2.43 million barrels per day of crude oil, and 10,243 million cubic feet per day of natural gas, which corresponds to 1.71 million barrels per day of oil-equivalent (natural gas converted to oil-equivalent at 6 million cubic feet = 1 thousand barrels).
Natural gas price in the U.S. has shown a significant rebound in the last six months. The last Henry Hub natural gas price of $2.74 per million Btu is already up 70% from its more than 36-year low on March 4, 2016, of $1.61 per million Btu.
Natural Gas, Weekly Chart
Chart: TradeStation Group, Inc.
The increase in the price of natural gas in the U.S. will contribute to higher revenue for Exxon in the current quarter, and probably in the few next quarters. Demand for natural gas which is also used for heating homes rises in the winter time. Exxon's natural gas production in the U.S. of 3,129 million cubic feet per day in the first six months of the year accounted for 31% of the total gas production of the company.
Liquefied natural gas prices are more correlated to the price of crude oil than to the price of natural gas in the U.S. However, as I argued in my previous article about Exxon, oil prices are poised to increase significantly, which will cause Exxon's upstream operations earnings to recover, along with a considerable rise in its stock price. There are continuing signs of improving oil fundamentals. According to OilPrice.com, market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year. As the demand for liquefied natural gas is poised to grow at a higher rate than the demand for oil, I believe that its price will rise at a higher rate than the price of oil.
Exxon Stock Performance
Since the beginning of the year, XOM stock is already up 14% while the S&P 500 Index has increased 6.8%, and the Nasdaq Composite Index has gained 5.1%. However, since the beginning of 2012, XOM's stock has gained only 4.9%. In this period, the S&P 500 Index has increased 73.6%, and the Nasdaq Composite Index has risen 102.1%. According to TipRanks, the average target price of the top analysts is at $94, representing an upside of 5.8% from its September 8 price, however, in my opinion, the shares could go higher.
While waiting for a significant recovery in the prices of liquefied natural gas and oil, investors can enjoy the generous dividend. Exxon has increased its annual dividend payment to shareholders for 33 consecutive years. Even during the global economic crisis in 2008-2009, Exxon continued to grow its dividend. The current dividend yield is pretty high at 3.40%, and the payout ratio is at 116.8%. The annual rate of dividend growth, over the past three years at 9.7%, over the past five years at 10.6%, and over the last ten years at 9.7%, was pretty high.
The fact that Exxon is investing significantly in liquefied natural gas projects demonstrates its belief in the long-term increasing demand for LNG. According to U.S. Energy Information Administration, LNG demand will rise 1.9% a year through 2040, more than double the rate for crude oil. Natural gas price in the U.S. has shown a significant rebound in the last six months. LNG prices are more correlated to the price of crude oil than to the price of natural gas in the U.S. However, oil prices are poised to increase significantly, along with the prices of LNG which will cause Exxon's upstream operations earnings to recover, along with a considerable rise in its stock price.