By Yaser Anwar, CSC of Equity Investment Ideas

• Exxon lowered production growth for the next 3 years with production of approximately 4.7 million b/d vs. 5.0m b/d announced last year. The primary ’cause for delays was partner operated projects, especially in Kashagan and Tengiz (management also canceled the Qatar GTL project and withdrew from Angola LNG).
• Even with lower production forecasts, Exxon is on track with 2005-10 organic production CAGR of 2.2% vs. industry avg. of 1.9% over the five-year period. Medium term upstream capex expectations, on a comparable basis, have risen by approximately $2bn per annum in both 06 and 07. Upstream capex per barrel produced is up 30% in the last three years.

Here’s an excerpt from one of my paid columns, where I also discussed Exxon’s analyst meeting-

"Starting from the base of 4.2 million b/d in 06, Exxon expects that 20 project start-ups over the next 3 years will add 1 million b/d net production at peak to Exxon. The forecast does not include any divestments going forward. The Street was already forecasting a lower number at 4.77 million b/d for 2010 and have reduced their numbers further to account for slippages and divestments as they think Exxon Mobil will likely continue to be an active seller given the commodity price environment.

I believe that XOM’s focus on cost reduction and its successful integration with the Chemicals and Lubes segments are the two key factors which enable it to deliver premium returns in the downstream segment. 75% of Exxon’s refining capacity is integrated with chemicals, an area most other integrateds have struggled at.

Management indicated that $5 billion improvement in downstream net income from 00 to 06 was due to self-help measures as the benefit from the rise in industry margins was offset by inflation, FX and other activity." (it seems they haven’t published it yet, oh well, this is the site)

• Exxon’s announcement of lowering production shouldn’t come as a surprise, as similar announcements were made by Shell, BP and Total earlier and was consistent with Street expectations of lower non-OPEC production adds supporting higher crude prices to the end of the decade. This is due primarily to stretched supply chains not depleting resources implying less volume sold at a higher price.

Keep in mind, non-OECD oil demand growth is higher at a time in which the overall oil market tighter in terms of supply and demand. And in North America, there is less spare natural gas production capacity.

Furthermore, the key in this environment of relatively low oil prices is cost discipline, an area in which Exxon’s management has had an excellent track record. Should costs remain under control, the lower production volume should have little effect on the stock. Exxon’s Capital budget for 2007 consists of approximately $20 billion CAPEX (with 16 billion for upstream) and $21 billion/year for 2008-2011 (which remained unchanged).

Exxon ended 06 with $32.8 billion in cash $5.54/share. In 06, XOM spent $16.2 billion upstream (activities are related to finding and producing commodities), $2.7 billion on the downstream (includes the refining, transformation and marketing of related products), $756 million on chemicals, and $139 million on corporate. Exxon also returned $32.6 billion to shareholders through buybacks dividends. During 06, XOM repurchase 7.35% of common stock, about 6% of the float.

I’m expecting Exxon will generate approximately $21 billion in FcF which will result in directed toward continued share repurchases equating to some 5% of shareholder capital. Assuming a 50-55 barrel of oil, Exxon would earn about $6/share.

For 07, The Street is expecting EPS range $6.5-52 in EPS from 3% volume upstream, where volume reflects start-ups in Angola, North Sea, and Qatar offset by PSC, OPEC, and slightly higher conventional field declines in the US and Europe. Given Exxon’s cash horde, Street is expecting roughly $300 million from interest income

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