Exxon and HAL Ink Drilling Deal

ExxonMobil Iraq Limited, a subsidiary of ExxonMobil Corporation (XOM - Analyst Report) has contracted US oilfield services company, Halliburton Company (HAL - Analyst Report) to provide drilling services in its West Qurna (Phase 1) oilfield in southern Iraq. Financial terms of the agreement were not disclosed.

Under the contract, Halliburton will provide an array of construction services for 15 wells in the West Qurna 1 oilfield via three drilling rigs. West Qurna, the largest oilfield in Iraq, is estimated to have up to 8.6 billion barrels of crude in reserve.

ExxonMobil Iraq holds a 60% interest in the Qurna project and acts as the lead contractor on the field. The company is already working with South Oil Company to accomplish Iraq’s strategic energy development plans. Other associate partners of the project include Oil Exploration Company of Iraq with a 25% interest and an affiliate of Royal Dutch Shell Plc (RDS.A - Analyst Report), Shell West Qurna holding the remaining 15%.

Last month, ExxonMobil announced that the initial field production at West Qurna 1 increased to 285,000 barrels of oil per day (bpd) from 244,000 bpd, which exceeded the 10% production growth target included under the technical services contract. Output from the West Qurna 1 field is estimated to reach 2.825 million barrels a day in the next 6 to 7 years.

Given the significant share of the upstream segment in ExxonMobil’s business (accounting for roughly 81% of fourth quarter 2010 net income), we believe it will retain its leverage to higher oil prices going forward. Further, political unrest in the Middle East and North Africa has prompted oil companies to remain optimistic on a solid rebound in prices. The company also expects global energy demand to grow 35% by 2030 from the 2005 level.

However, we remain disappointed by the company’s relatively low 2011 production growth guidance of 3% to 4% year over year. Particularly, after the full-year contribution from the XTO acquisition, a lower guidance for 2011 implies an equivalent drop in organic development.

We maintain our long-term Neutral recommendation on the stock. Exxon also holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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