Exxon facing natural-gas push queries

DAVID KOENIG and CHRIS KAHN AP Business Writers

DALLAS — Exxon Mobil Corp. rode higher oil prices to a $30 billion profit last year. But shareholders at its annual meeting Wednesday were more concerned about its big push into natural gas.

Since buying XTO Energy last year for $29 billion, Exxon has become the largest natural gas company in the United States. It now owns more gas than crude oil.

So far, the deal hasn’t paid off. Natural gas prices are around $4.42 per 1,000 cubic feet. That’s slightly below the price when the XTO deal closed and well below levels seen three years ago. That’s one reason, analysts say, Exxon’s stock has lagged behind that of rivals Chevron and ConocoPhillips.

Chief Executive Rex Tillerson defended Exxon’s emphasis on natural gas in his opening remarks to shareholders.

“Natural gas will be the fastest-growing major energy source and will overtake coal as the second-largest global energy source behind only oil,” he said.

In January, Exxon said it expected natural gas to supply 26 percent of world energy demand by 2030, up from 22.1 percent in 2010. Oil is expected to provide 32 percent and coal will provide 21 percent, a drop from 34.2 percent and 25.3 percent respectively.

Gas drilling is also attracting more attention from environmentalists and government officials who say it poses the threat of contaminating underground water supplies.

Shareholders voted 3-to-1 to reject a resolution that called for the company to disclose more information about hydraulic fracturing or “fracking” — the pumping of tons of water and chemicals into the ground to break open rock formations and extract the gas.

Chevron, which has boosted its own natural gas business in the past year, faces a similar vote at its own shareholder meeting Wednesday.

Tillerson said fracking technology has been around for decades — it’s just being used more widely today — and can be done safely.

“There is nothing mysterious about any of this to those of us who work in this industry,” he told reporters after the meeting. “Those who want to stop the development have stuck the mysterious label on it.”

Exxon is conducting advertising and organizing town hall meetings in an effort to convince the public that fracking is safe. Tillerson said the company is also paying for polling, but it’s too soon to know whether its campaign is working.

Such controversies are not new at Exxon meetings. Every year, shareholders face a long list of resolutions on everything from greenhouse gas emissions to gay rights.

In 2010, Exxon staged a comeback of sorts. It earned $30.5 billion after making $19.3 billion in 2009, its smallest profit in seven years.

But Exxon shares rose just 7 percent last year compared with a 19 percent gain at Chevron and 33 percent at ConocoPhillips. They’ve been more competitive so far this year. Still, only four of 17 analysts surveyed by FactSet have a “Buy” rating for Exxon.

Benchmark Co. analyst Mark Gilman said Exxon’s share price — it closed Tuesday at $81.29 — isn’t justified by future growth potential.

Argus Research analyst Phil Weiss said Exxon has lots of cash, little debt and a tradition of efficient operations. He has a “Buy” rating on the stock. But he’s concerned about the short-term effects of the XTO deal, which could be an even bigger handicap if natural gas prices remain low.

“In the current environment, that’s a big disadvantage,” he said.

Weiss said Exxon also appears to be having a hard time finding new sources of oil. The company increased its petroleum reserves last year mostly by buying companies instead of discovering new fields, he said.

But a 40 percent jump in oil prices over the past 12 months has helped offset the weakness in natural gas prices. Exxon Mobil earned $10.65 billion in the first quarter of this year, its biggest quarterly profit since a record $14.83 billion in the third quarter of 2008.