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Exxon Mobil Corporation (XOM): Will Natural Gas Decline Further?

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In the past several days, the price of natural gas tumbled lower. Despite its recent fall, the price of natural gas is still higher than where it was trading last year. Will natural gas continue to fall? How will the recent developments in the natural-gas market affect leading oil and gas producers, such as Exxon Mobil Corporation (NYSE:XOM)? Let’s also take a look at the liquefied natural gas (LNG) market.

Exxon Mobil Corporation (NYSE:XOM


Natural-gas storage remains low compared to last year’s levels and compared to the five- year average. During May, the storage buildup was 276 Bcf. In comparison, during the same time frame in 2012, the buildup was 168 Bcf. If the buildup pace continues to pick up, this could suggest that the natural-gas market is loosening up.

The chart below shows the weekly natural-gas price and storage in recent years.

Natural gas consumption and production

The demand for natural gas in the residential/commercial sector tumbled lower in recent weeks as the weather began heating up. On the other hand, consumption in the power sector rose as leading utility companies continued using their natural-gas stockpiles for electricity. But as their stockpiles will dwindle in the coming weeks, they are likely to shift back to coal. Considering the high price of natural gas compared to last year’s levels, it’s more likely that utility companies will turn back to coal. In such cases, the demand for natural gas in the power sector is also expected to fall. On the other hand, natural-gas production continues to rise slowly. If these trends persist in the coming weeks, they could lead to a further drop in prices.

Natural gas and leading oil and gas companies

Despite the recent fall in the price of natural gas, and the fact that it’s still higher than last year’s levels, this won’t help leading oil and gas companies, such as BP plc (ADR) (NYSE:BP), all that much. BP plc (ADR) (NYSE:BP)’s upstream natural gas production dropped by 5.6% during the first quarter of 2013; the realized price of natural gas rose sharply by 17.9% (year-on-year). Thus, natural-gas revenue grew by more than 10% in the first quarter of 2013.

Nonetheless, the company’s upstream operations generated 7.8% of BP plc (ADR) (NYSE:BP)’s total revenue in the first quarter of 2013 compared with 9.2% in the first quarter of 2012. Moreover, natural gas accounted for only 23% of total upstream revenue. This means natural-gas upstream revenue generated only 1.8% of BP’s total revenue in the first quarter of 2013. Therefore, even if natural gas rallies, its effect on BP’s revenue will be minor.

Exxon Mobil Corporation (NYSE:XOM) (opens pdf) also cut its natural-gas production by 5.8% in the first quarter of 2013 compared with the first quarter of 2012. Conversely, its natural-gas realized price spiked by 21% (year-on-year). Exxon Mobil Corporation (NYSE:XOM)’s natural-gas sales account for less than 10% of its operations. The company’s total revenue fell during the first quarter of 2013 mainly on account of the drop in oil prices and petroleum-product sales.

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