Engineering News

Exxon's Big Chemical Unit Stands Out Amid Low Natural Gas Prices
June 6, 2011

Exxon Mobil Corp. (XOM), the world's largest oil and gas company, has an unsung hero: its chemical business.

The production and sales of plastics and other chemicals accounted for $4.9 billion in profit on 2010, a record-breaking figure that surpasses the earnings of any other chemical maker except Germany's BASF (BAS.F). Usually relegated to obscurity, Exxon's chemical unit was more profitable in 2010 than both its U.S. oil and gas operations and its whole fuel-making business. That trend continued in the first quarter of 2011, when chemicals earned $1.5 billion for Exxon, about one-seventh of its total profit.

"The chemical story hasn't been particularly well understood," said Stephen Pryor, president of Exxon's chemical unit, in a recent interview. "That's changing fast."

The success of Exxon's chemical unit comes as some shareholders criticized Exxon's embrace of the natural-gas business with its $25 billion acquisition last year of independent U.S. oil and gas producer XTO Energy Inc.

The acquisition took place amid a glut in the natural gas market--the fruit of technology recently developed by XTO and similar companies to exploit gas trapped in hard-to-crack shale formations. Many in Wall Street think the glut will last for years--damping Exxon's usually stellar returns on investment. Exxon maintains that natural gas usage is rapidly growing because it is cheaper and cleaner than oil, and its XTO bet will pay off handsomely in the long term.

In 2010, the first year when the XTO acquisition was incorporated into Exxon's balance sheet, the company's return on average capital employed for its U.S. oil and gas unit went down to 12.2%, from 18.2% in 2009.

But the chemical business turned out to be the flip side of the cheap natural-gas coin. Relatively inexpensive natural gas liquids, combined with increasing industrial demand as the economy bounced back from the recession, boosted the chemical company's profitability, especially in the U.S.; its 2010 average return on capital in the U.S. rose to 53% in 2010, from 17.6% in 2009.

Even though Pryor acknowledges that many analysts focus on Exxon's oil side, he said the chemical business's profitability can help the company stand out in the eye of investors. "We absolutely believe that the chemical company is an enormous differentiator versus the other majors," many of which either have maintained a smaller or nonexistent presence in chemicals.

In addition, Exxon's chemical operations are closely integrated with its refineries, allowing the company to send raw materials to one or the other based on whether at any moment in time it's more profitable to produce fuel or chemical products.

Pavel Molchanov, an analyst with Raymond James, says that the humongous size of Exxon's chemical business is unique, and allows it to fund key aspects of its corporate strategy, such as share buybacks.

Some oil-and-gas investors, however, find it hard to distinguish the role played by the chemical unit within Exxon's ensemble, says Phil Weiss, an analyst with Argus Research. "I don't think many investors get too excited about what's going on in chemicals," he says. "It's looked at as a unit that's going to be profitable and deliver some cash flow that Exxon is going to deploy in other businesses" more central to the company's core strategy.

Source: Dow Jones Newswires

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