2 Legal Battle Updates In The Oil & Gas Sector: Exxon Mobil Corporation (XOM), TOTAL S.A. (ADR) (TOT)

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Now is a great time to examine the recent developments in the legal problems for ExxonMobil Corporation (NYSE:XOM) and the implications for the company. Specifically, I will discuss the company’s legal problems in the states of Maryland and New Hampshire. I will also examine the company’s transformation from producing natural gas to producing more oil and liquids.

Legal developments

The highest court in Maryland has overturned jury verdicts requiring ExxonMobil Corporation (NYSE:XOM) to pay in excess of $1.5 billion in damages after a leak from a gas station polluted a community’s drinking water in 2006. The Court of Appeals of Maryland has issued two rulings recently, ordering new trials in cases related to the incident. The larger case was brought by 150 families and businesses and, in 2011, a jury awarded $1 billion in punitive damages and $495 million in compensatory damages. The higher court has overturned the punitive damages on the grounds that they could only be awarded if the plaintiffs proved that the company had intended to act wrongfully, and this was not the case.

Meanwhile, ExxonMobil Corporation (NYSE:XOM) has begun its defense against a claim from the state of New Hampshire that it should pay millions of dollars spent by the state to clean up groundwater that was contaminated because of MTBE. The state has claimed that MTBE (methyl tertiary butyl ether) is a defective product because of its ability to travel farther and faster and contaminate larger quantities of water compared to gasoline without additives. The state is seeking more than $700 million to test 250,000 private wells and clean up approximately 5,600 contaminated sites. ExxonMobil Corporation (NYSE:XOM) is the only defendant that has not settled with the state on the grounds that MTBE did what it was supposed to by replacing lead in gasoline and reducing emissions in compliance with the 1990 Clean Air Act. New Hampshire is the only state that has reached the trial stage in a lawsuit over MTBE.

The transformation from gas to oil

ExxonMobil Corporation (NYSE:XOM) has added an additional 1.8 billion barrels of oil equivalents (BOE) to its proven oil and gas reserves in 2012, of which 1.4 billion consisted of crude and other liquids. This increases Exxon’s total proven reserves to 25.2 billion boe at the end of 2012, up from 24.9 billion boe as of the end of December 2011.

Exxon has sensibly and strategically shifted weightage away from natural gas towards liquids by buying a number of quality assets at low prices. In 2011, its total reserves were made up of 51% natural gas and 49% liquids, but, by the end of 2012, this reversed to 49% natural gas and 51% liquids. The 2012 liquid additions make for a 174% reserve replacement ratio (RRR) for crude and other liquids in 2012, and only 56% for natural gas. Over the past few years, however, crude and other liquids’ replacement ratio for ExxonMobil Corporation (NYSE:XOM) has been 102%, while adding natural gas reserves 45% faster than it produced.

Exxon has shown a decline in upstream performance and abroad as a result of pulling back from riskier overseas operations and focusing more on revenue stream diversification. It has altered its revenue structure significantly, earning 74% of its revenue from drilling, instead of 90%. Refining accounted for just 4.3% of sales in 2011 and now accounts for just under 17%. Because of the domestic supply situation of oil and natural gas, Exxon has concentrated on gaining more from downstream and chemical production.

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