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Arctic Mega-Deal Has Exxon Mobil Stock Heading North

Exxon Mobil (NYSE: XOM) is one of those stocks that seems almost too obvious to invest in. It’s so large a company that few believe it has any room left to grow.

But don’t get suckered into that narrative. The reality is that while Exxon may not be flashy, it’s both dynamic and dependable and it continues to find ways to surprise investors.

For example, take its $500 billion deal with Russia’s Rosneft.

Exxon gained first-mover rights to Russia’s vast arctic deposits, which are believed to hold as much 100 billion metric tons of oil equivalent, or 70% of Russia’s total hydrocarbon reserves. And all the company had to give up was a few token stakes in three of its unconventional North American reserves.

That news was enough to push Exxon stock up 3% this week – news of the deal broke last Friday – reversing the slight decline the company had experienced at the start of the month.

And as Russian Prime Minister and President-elect, Vladimir Putin, pointed out, the deal has already added $7 billion to Exxon and Rosneft’s combined market capitalization.

It’s easy to see why. With that one swift move Exxon showed why it’s an industry kingpin:

  • It outmaneuvered its rivals – including BP PLC (NYSE: BP), Royal Dutch Shell (NYSE: RDS.A, RDS.B), Total SA (NYSE: TOT) and Eni SpA (NYSE: E) – which were also looking to gain a foothold in the prized Arctic region.
  • It demonstrated the value of its growing portfolio of unconventional assets.
  • And it locked up a new cache of crude reserves at a time when other global oil majors are scrambling far and wide for untapped assets.

Now, it’s true that the relationship between Russia and Western oil majors has been spotty. The harassment and outright expulsion of foreign companies have made Russia a somewhat risky place to do business. But those risks are also well justified by the potential rewards.

Exxon and Rosneft will develop three fields in the Arctic with recoverable hydrocarbon reserves estimated at 85 billion barrels of oil equivalent. That’s important, because the governments of many resource-rich nations are growing increasingly protective of their energy assets as both prices and demand surge.

There’s also increased competition from foreign oil majors to worry about. Gone are the days when Exxon’s competition was limited to the likes of Chevron Corp. (NYSE: CVX), ConocoPhilips (NYSE: COP) and Shell. Not only have global players like Eni and Total emerged, but state-run oil companies like Petrobras (NYSE: PBR) and PetroChina (NYSE: PTR) have exploded on the scene, scoffing up assets the world over.

In fact, PetroChina actually pumped more oil than Exxon did last year, churning out 2.4 billion barrels per day (bpd). That was a 100,000 bpd more than the former champion. Coincidentally, Exxon also fell behind Rosneft in that department.

Of course, that also plays into Exxon’s 21st century strategy, which has been distinguished by a decisive move into natural gas.

You see, Exxon has taken great pains to reinvent itself. The centerpiece of its transformation, of course, was the $35 billion acquisition of XTO Energy in 2010. That deal doubled Exxon’s natural gas production and, more importantly, allowed the energy giant to absorb XTO’s fracking expertise.

With a glut of natural gas on the market, prices have been depressed and the deal has yet to pay off. But this is a long-term strategy for Exxon, which sees cleaner natural gas leapfrogging coal to become the world’s second-largest energy source by 2025. The company also expects energy demand to soar 80% by 2040.

Exxon has prepared for a sharp rise in Asian energy demand with a $15.7 billion liquefied natural gas (LNG) project in Papua New Guinea. It’s also partnered with Chevron on the $37 billion Gorgon LNG project in Australia.

Exxon can be patient and wait for these long-term plans to unfold. It has that luxury thanks to having turned a $9.4 billion profit in the fourth quarter of 2011.

Investors should be patient, as well. This is a company that has returned 153% to investors over the past 10 years when dividends are taken into account. And it could do even better over the next decade as fracking gains more global acceptance and energy demand rises to absorb excess supply.

In the meantime, analysts expect Exxon to pacify investors by raising its quarterly dividend 10% to 33% next week. That will take its stock yield up from 2.2% closer to 3% – a level more in-line with its peers.


Jason Simpkins

Jason Simpkins

, Energy Editor

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