Exxon Gets Nod for Hebron

ExxonMobil Corporation (XOM - Analyst Report) has won the approval from the Canada-Newfoundland and Labrador Offshore Petroleum Board related to the Hebron oil project off Newfoundland.

Hebron − located 217 miles southeast of St. John's, Newfoundland and approximately 300 feet under water − is a heavy oil field expected to hold over 700 million barrels. The approval will allow the Exxon led group to move ahead with the development of Hebron oil field offshore Newfoundland. The facility is expected to generate up to 150,000 barrels a day (BPD), which may be enhanced to tackle as much as 180,000 BPD.

The project, believed to be the fourth offshore oil project in the province, is estimated to cost around C$5 billion (US$4.85 billion) to C$7 billion in 2008. Although the field was discovered back in 1981, the developmental work was delayed for the tepid oil prices and disagreements over royalty rates with the provincial government.

Chevron Corp. (CVX - Analyst Report) was supposed to be the operator of the Hebron project that was reassigned to ExxonMobil in October 2008. ExxonMobil remains the operator of the project with a 36% share. The co-venturers are Chevron with a 26.7% share, Suncor Energy Inc. (SU - Analyst Report) with 22.7%, and Statoil ASA (STO - Analyst Report) with 9.7%. The provincially owned Energy Corporation of Newfoundland and Labrador holds 4.9% equity stake.

ExxonMobil reported disappointing first quarter 2012 results on lower production volume. Its quarterly production decreased more than 5% year over year. The company also expects oil and gas production to decline 3% in 2012 after a modest rise of 1% in 2011. We see ExxonMobil struggling to consistently grow production volumes over time.

However, we believe that ExxonMobil will retain its leverage to higher oil prices going forward given its significant share in the upstream business. Moreover, ExxonMobil is the best run integrated oil company in the world, given its track record of superior return on capital employed. Therefore, we advocate it as a core holding for investors seeking a defensive name with continued dividend growth.

We maintain our Neutral recommendation on ExxonMobil for the long term. The company holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months.