Exxon MobilCorp. said it would expand its oil and natural gas production this year, a notable feat for any large Western oil company. But analysts are growing concerned that much of the new production will be under conditions that could mean smaller returns than in the past.
The Irving, Texas-based energy giant said Thursday its production of oil and gas should expand by between 3% and 4% this year, equaling the company's best performance since a giant merger a decade ago. The expansion doesn't include Exxon's pending acquisition of U.S. natural-gas firmXTO EnergyInc., which could boost growth to between 9% and 10% if the deal closes as expected by mid-year.
Several energy analysts, however, maintain that the company's future output—from projects as diverse as mining Canada's oil-soaked tar sands services work at long-neglected Iraqi oilfields—could deliver lower returns than in the past because of contract terms or other restrictions.
Western oil majors are increasingly hampered by aging fields with declining output and the hot new fields are controlled by state-owned companies that offer less profit to production partners.
Adding to the concern is Exxon's pending $28.8 billion acquisition of XTO, a U.S.-focused gas driller, which would boost production but runs the risk of consuming capital and management focus without generating big profits.
"The big question is XTO. How on earth do you make a decent return on that?" asked Deutsche Bank analyst Paul Sankey. "They are basically saying, 'Trust me.'"
Exxon Chief Executive Rex Tillerson said the company would focus on delivering better returns than its peers. He acknowledged that many of the company's new projects don't offer the potential for the windfalls that characterized some past deals. "We don't get a lot of upside, but on the flipside you get a lot of downside protection," he said.
Many of Exxon's decades-old producing fields that have driven years of strong returns—its Alaskan oil production as well as giant Dutch and Indonesian natural gas field—are producing less. Exxon said output from its existing fields was declining at a 5%-a-year pace.
The company said it doesn't expect to get a lift from its refining and fuel-sales, as the poor economy is depressing demand for gasoline and keeping profit-margins flat. Exxon is the world's largest refinery operator by volume.
"We think margins will remain under pressure for several years," Mr. Tillerson said of the recession-battered refining business, which also has been hurt by excess capacity. Exxon competitors Total SA andChevronCorp. said in recent days they are planning to either sell or shutter refineries.
Other large oil companies are looking to match Exxon's envied profit machine. Earlier this month,BPPLC unveiled plans to boost its profits by streamlining its operations to find savings. Chevron said this week it would lay off 2,000 workers this year, after cutting a similar number of jobs last year.
Exxon plans to continue investing heavily in the businesses of finding oil and gas, refining and chemical production, to replace barrels lost as existing oil fields undergo natural declines. It plans a $28 billion capital budget this year, a record for the company, up slightly from 2009.
Mr. Tillerson said he expects that demand for fossil fuels will eventually rebound from its current, prolonged slump. "Economic growth will drive recovery and demand," he said, "We just don't know how fast, at what rate or when."