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Exxon Dives Deep into High-Risk Exploration

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(THE WALL STREET JOURNAL), Feb. 2, 2010

Hardly known as a wildcatter, Exxon Mobil Corp. is searching for oil in most of the world's regions where high-risk exploration is under way, even as other big oil companies are being more selective and cutting capital spending.

So far, though, Exxon has little to show from its exploration campaign and needs to make large discoveries soon to justify the increased spending.

Exxon has "tried to put a tiger in the exploration hat," said Neil Mc Mahon, a Sanford C. Bernstein & Co. analyst. But it has "only pulled out a fluffy bunny so far."

Exxon said capital spending reached $27.1 billion last year, up 3.6% from a year earlier. Fourth-quarter spending reached $8.3 billion, Exxon's highest three-month total ever. Exploration expenses charged to income, which capture spending on unsuccessful wells, rose 39% last year.

The Irving, Texas, company on Monday posted fourth-quarter profit of $6.05 billion, down 23% from a year earlier. Revenue rose 6.1% to $89.84 billion.

Exxon's refining segment -- which turns crude oil into gasoline, diesel and other petroleum products -- swung to a $189 million operating loss. But Exxon's upstream operation, which finds and produces oil and natural gas, generated operating income of $5.78 billion, up 2.6%.

The results underscore why the company is increasing its focus on the still-profitable business of discovering new fossil-fuel deposits.

Exxon is exploring in eight of the "hot," high-risk exploration regions around the world identified by Sanford C. Bernstein and is attempting to invest in a ninth. Aside from Royal Dutch Shell PLC, which is nearly as active, most other oil companies have interests in only half as many such areas, at most.

And Exxon is looking to expand its reach to a tenth hot spot. The company is in talks with Transocean Ltd. to sign a lease for a new drilling rig capable of operating in the harsh Arctic climate, people familiar with the negotiations said.

Wildcat drilling, exploration in untested areas, is under way elsewhere by Exxon. The company said a well in the Sulu Sea off the Philippines, which began operation in October, encountered natural gas. A second well is under way. A second wildcat well also is being drilled off the coast of Libya, after a first well came up dry, the company said.

Exxon also is getting ready to explore the Black Sea. Its partner in the region, Petroleo Brasileiro SA, partially disassembled a drilling rig recently in order to move it under the two bridges that span the Bosporus in Turkey. Pankaj Khanna, chief operating officer of DryShips Inc., which owns the rig, said he expects it to remain in the Black Sea for five years or longer to be used by Petrobras and Exxon.

Other oil companies are cutting spending, meanwhile. Marathon Oil Corp. on Monday said it would cut 2010 capital spending by 17% to $5.1 billion, though it would increase the portion devoted to exploration. IHS Herold, an oil & gas consultant, estimated that BP PLC and Chevron Corp., reduced upstream capital spending last year by 36% and 7.9% respectively.

Still, Exxon has had high-profile misses in the past two years in waters off the coasts of Brazil, Colombia and eastern Canada. If exploration off Brazil, Madagascar, New Zealand and Greenland doesn't produce big discoveries, Mr. McMahon said, Exxon might have to buy assets from other companies to replenish its oil and gas supplies.

A large offshore well often costs in excess of $100 million, but drilling a dry hole is still part of the business, Exxon executives said. "It's a high-risk activity. Some are not successful, but we did have some success and in fact we're quite pleased with the results of the drilling program," said Exxon Vice President Kenneth Cohen. He highlighted recent discoveries in Australia, the Philippines and British Columbia.

Exxon isn't relying on exploration alone to expand its reserves. In December it announced a $31 billion deal to purchase natural-gas developer XTO Energy Inc. of Fort Worth, Texas. Exxon also is in negotiations to buy its way into a new exploration zone off the coast of Ghana through a $4 billion deal with Dallas-based Kosmos Energy LLC.

Also Monday, Exxon said it was studying whether to keep its headquarters in Irving or relocate to land it owns in north Houston. A decision isn't expected until until next year.

Copyright (c) 2010 Dow Jones & Company, Inc.

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