ExxonMobil Outlook for Energy Bullish on Future Demand

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U.S. energy behemoth, ExxonMobil Corporation's XOM recently released 2015 Outlook for Energy reveals its expectation of significant growth in the global middle class, expansion of emerging economies and an additional 2 billion people in the world to contribute to a 35% increase in energy demand by 2040.

Per the company, as demand increases, the world will continue to become more efficient in its energy use. Without efficiency gains across economies worldwide, energy demand from 2010 to 2040 would head toward a 140% increase instead of the 35% forecast in the report.

ExxonMobil's Outlook for Energy projects that carbon-based fuels will continue to meet about three-quarters of global energy needs through 2040, which is consistent with all credible projections, including those made by the International Energy Agency. The outlook shows a shift toward lower-carbon fuels in the coming decades that, in combination with efficiency gains, would lead to a gradual decline in energy-related carbon dioxide emissions.

Wind, solar and biofuels are expected to be the fastest-growing energy sources, increasing about 6% a year on average through 2040, when they will be approaching 4% of global energy demand. Renewables in total will account for about 15% of energy demand in 2040. Nuclear energy, one of the fastest-growing energy sources, is expected to nearly double from 2010 to 2040, with growth in the Asia Pacific region (led by China) accounting for about 75% of the increase.

The global middle class is expected to increase from about 2 billion in 2010 to almost 5 billion people by 2030, representing more than half of the world's population, according to the Brookings Institution. As projected, the middle class expansion – largely in India and China – will be the largest in history and will have a profound impact on energy demand. Along with income gains, on-going societal changes such as expanded infrastructure, electrification and urbanization will contribute to greater energy use.

The Outlook for Energy identifies a significant evolution in the trade of oil and other liquids. A major shift is seen as North America will likely become a net exporter of liquids by 2020 as supplies of so-called tight oil, natural gas liquids and bitumen from oil sands increase. This is expected to open new trading opportunities as Asia Pacific's net imports are projected to rise nearly 80% by 2040. Africa's liquids exports are expected to decline as local demand more than doubles. In Latin America, growth in supplies is anticipated to outpace demand as supplies of deepwater and unconventional liquids expand.

North America unconventional gas production will nearly triple by 2040 and surpass the combined output of Russia and the Caspian region as the largest gas-producing area. In the Asia Pacific, gas production is seen doubling by 2040, driven partly by unconventional production technologies. Demand in the region is expected to climb about 170%, according to the outlook, and as a result, the Asia Pacific will likely overtake Europe as the world's largest gas importer.

Natural gas is expected to be the fastest-growing major fuel source during the outlook period as demand increases by about 65%. Half of that increase will come from the Asia Pacific region, led by China. Utilities and industrial operations are expected to account for about 80% of the demand increase worldwide, as operators increasingly choose natural gas because of its lower emissions and versatility as a fuel and feedstock. By 2040, natural gas is expected to account for more than a quarter of global energy use, surpassing coal in the overall mix.

Demand for coal is expected to rise through 2025 and then decline as China's economic growth gradually slows and follows the shift seen in Organisation for Economic Co-operation and Development (OECD) countries toward cleaner fuels. Still, over time, global coal demand is expected to remain prominent in the Asia Pacific, primarily to support growing power-generation requirements.

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 four-fifth of Exxon Mobil's earnings come from its operations outside the U.S.

ExxonMobil is one of the world's best-run integrated oil companies given its track record of superior returns on capital employed. The energy giant has long been a core holding for investors seeking a defensive name with continued dividend growth. ExxonMobil is fairly active in its investment program.

The strength of ExxonMobil lies in its balanced operations, strong financial flexibility, steady improvement in efficiency and cost control. The company's efforts to build an unconventional resource portfolio both in North America and overseas are aimed at increasing production through a wider exposure to large energy resources with a long reserve life and low field declines. However, we are skeptical about the company's near-term performance due to its muddled refining fortunes.

ExxonMobil currently holds a Zacks Rank #3 (Hold). Investors interested in the oil and gas sector could consider better-ranked stocks like Sandridge Mississippian Trust II SDR, Atlas Pipeline Partners, L.P. APL and Murphy USA Inc. MUSA. All of these carry a Zacks Rank #1 (Strong Buy).


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