ExxonMobil Agrees To A Compromised LNG Deal With Petronet

World's largest publicly traded oil company, ExxonMobil Corporation (NYSE:XOM) recently engaged in contract negotiation with India’s Petronet LNG Limited, a state-run natural gas importer. ExxonMobil agreed to a price cut on a 20-year deal for supplying liquefied natural gas ("LNG") to Petronet from its Gorgon project in Australia. Per the deal, ExxonMobil will increase supply volume by 1 million tonnes annually to around 2.5 million tonnes per year.

Background

In 2009, ExxonMobil signed a deal with Petronet to supply 1.44 million tons of LNG per year for 20 years at a price, which was higher than the spot price. It made Petronet a significant importer of ExxonMobil’s Gorgon production. However, the oil price crash of 2014 and LNG supply glut led buyers to demand renegotiation, which most of the suppliers had to agree to. The latest deal between ExxonMobil and Petronet deal reflects a similar situation.

Renegotiation Effect

Following the renegotiation, ExxonMobil has agreed to supply Petronet the original quantity of liquid gas at 13.9% of the Brent oil price, lower from 14.5% earlier. Per the deal, the additional supply of 1 million tons will be priced at around 12.5% of the Brent price. Per Reuters, the supplying company has agreed to bear the shipping charges as well. The company is now estimated to earn 15% less revenues per unit on its sales to Petronet. India being the third largest LNG buyer in Asia exercised its clout over the Irving, TX-based oil major.

Implication of the Deal

Revisions of long-term LNG contracts, which are not in favor of a major producer, is not something the oil market wants to see at the moment. The situation depicts the oversupply in the market that diminishes the control of suppliers over the market. It will bring more flexibility to buyers, taking a toll on prices.

About the Company

Irving, TX-based ExxonMobil is the world’s largest publicly traded oil company, engaged in oil and natural gas exploration and production, petroleum products refining and marketing, chemicals manufacture, and other energy-related businesses. Approximately 83% of ExxonMobil’s earnings come from operations outside the United States. The company divides its operations mainly into three segments: Upstream, Downstream and Chemicals.

ExxonMobil is the world’s best run integrated oil company, given its track record of high return on capital. It has collaborated with Russia for exploring potential commercial reserves in the country. However, tensions between the United States and Russia might affect its efforts to generate shareholder value by exploiting Russian oil and gas reserves.

Price Performance

ExxonMobil has lost 12.2% of value year to date compared with 4.1% fall witnessed by its industry.

Zacks Rank and Stocks to Consider

ExxonMobil carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the oil and energy sector are Lonestar Resources US Inc. (NASDAQ:LONE) , Range Resources Corporation (NYSE:RRC) and Subsea 7 SA (OTC:SUBCY) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lonestar Resources’ sales for 2017 are expected to surge 60.2% year over year. The company delivered a positive earnings surprise of 62.5% in the second quarter of 2017.

Range Resources’ sales for the third quarter of 2017 are expected to increase 27% year over year. The company delivered an average positive earnings surprise of 51.8% in the last four quarters.

Subsea’s sales for 2017 are expected to increase 11.6% year over year. The company delivered an average positive earnings surprise of 83.8% in the last four quarters.

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