Eastern Canada A New Long-Term Growth Driver For This Oil & Gas King
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In yet another sign that big oil discoveries will happen in and around North America, ExxonMobil (NYSE: XOM) announced that it will spend $14 billion to develop the thirty year old Hebron oil field. The field is located 350 kilometers southeast of St. John's, Newfoundland, in Canada. The decision to spend $14 billion in this project will help ExxonMobil increase its revenues in the long-term.
The Hebron oilfield holds more than 700 million barrels of crude oil, worth approximately $77.8 billion. Daily output will peak at 150,000 barrels once production begins in 2017. Though $14 billion is a large figure, the investment will help Exxon to increase its presence in Canada and increase its crude oil production. This will boost Exxon's net production and increase its sales, driving its profits higher. Exxon's profit margins will increase. ExxonMobil is already experienced with drilling in the Arctic region, and the Hebron oilfield lies just south of the Arctic Circle.
Brian Youngberg, an analyst at Edward Jones & Company, suggests that Exxon is growth-challenged at the moment and needs to invest in new oil fields. In the long run, these fields will help Exxon to remain in the top position in the U.S. among major oil companies. According to the deal, Exxon is the operator of the Hebron oilfield and owns 36% stake in it. The other partners are Chevron (NYSE: CVX), Suncor (NYSE: SU), Norway's Statoil (NYSE: STO) and Newfoundland-based Nalcor Energy. Hebron oilfield was disputed and plans to develop it failed as there were disagreements with provincial officials. Chevron later allowed Exxon to fully operate the project.
The Hebron Oilfield Will Increase Exxon’s Margins
The Hebron oilfield will prove to be a cash cow as the North American Atlantic coast is home to huge oil and natural gas reserves. The U.S. government does not allow drilling off the coast of the Atlantic. However, this is allowed in Canada. Many energy companies have flocked to Canada in recent months. ExxonMobil will offset many risks that it takes in war torn places like Iraq and Nigeria, where losses due to security issues are common.
In Canada, ExxonMobil will be able to produce 150,000 barrels of oil per day without any political, security or financial risks. This will help to offset the risks Exxon faces in other parts of the world. If production begins in 2017, the project will last for at least 13 years, at the rate of 150,000 barrels of oil per day, with an existing resource of 700 million barrels. ExxonMobil's margin will improve in the long-term due to reduced expenditure and losses incurred in other countries.
Competitors in Newfoundland
Chevron, which holds a 26.7% stake in the Hebron project, also has set its eyes on the west coast of Canada. Recently, it purchased a 50% stake in the Kitimat LNG project, located in British Columbia. The project will help Chevron sell natural gas to countries like Japan, Korea and China. Chevron will now be able to establish itself as a major player in British Columbia's natural gas fields. Suncor Energy has a stake of 22.7% in the Hebron project. The company ended 2012 with above average oil production. It produced almost 385,000 barrels per day in December after producing 312,000 barrels in November.
Atle Aadland, Vice President of Statoil Offshore Canada, said that the company’s 9.7% share in the project will help it to establish itself in Newfoundland and Labrador. The company is looking at various opportunities to drill and explore in and around Canada because of the recent interest that the country has generated over its natural gas and crude oil resources. Back in November 2012, Royal Dutch Shell (NYSE: RDS-A) won exploration rights in five areas and made a commitment of $97 million to secure those properties. The five areas are located in Laurentian Sub-basin offshore Newfoundland and Labrador. It is unknown when Shell will begin the exploration and drilling process here.
ExxonMobil currently trades around $89 and has a market cap of $406 billion. With a price to book ratio of 2.42, price to sales ratio of 0.95, and forward annual dividend rate of 2.28, Exxon is one of the most tempting energy stocks to invest in. By choosing to invest $14 billion in the Hebron oilfield, Exxon has ensured that its profitability will increase in the future. At the moment, it has a profit margin of 10.40% and an operating margin of 11.50%. With return on assets of 9.31% and return on equity of 28.16%, it is one of the most effectively managed oil and gas companies. Furthermore, Exxon also has an operating cash flow of $54 billion, which makes it one of the most attractive energy stocks now and in the long-term.
StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends Chevron Corp and Statoil (ADR). The Motley Fool owns shares of ExxonMobil Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!