Exxon Disappoints as Vol Shrinks

U.S. energy behemoth ExxonMobil Corp. ( XOM - Analyst Report ) reported disappointing second quarter 2012 results on lower production volume. Earnings of $1.80 per share (excluding net gain on asset sale) failed to meet the Zacks Consensus Estimate of $1.95 and the year-ago earnings of $2.18 a share.

Total revenue in the quarter grew 1.5% year over year to $127.4 billion and comfortably surpassed the Zacks Consensus Estimate of $117.1 billion.

Operational Performance

Upstream: Quarterly earnings of the segment were $8.4 billion, down 2% from $8.5 billion a year ago. The decline was primarily due to lower sales volumes and lower oil/natural gas realizations.

Production averaged 4.152 million barrels of oil-equivalent per day (MMBOE/d) in the quarter, down 5.6% year over year. When adjusted for the impact of entitlement volumes and OPEC quota restrictions, production was unchanged from the prior-year quarter.

Liquid production experienced a downfall of 6.1% year over year to 2.208 million barrels per day, due to field decline. This was partially offset by the stepping up of Angola and Nigeria ventures, with lower downtime.

Again, field decline resulted in the natural gas production decline of nearly 5% on an annualized basis.

Downstream: The segment recorded profit of $6.6 billion in the second quarter of 2012 as against $1.3 billion in the year-ago period, mainly due to the restructuring in Japan. Further, margin improvement as well as volume mix also contributed to the increase.

ExxonMobil's refinery throughput averaged 5.0 million barrels per day (MMBPD), down from the year-earlier level of 5.2 MMBPD.

Chemical: This unit contributed $1.4 billion to the company’s profits, down from the year-earlier level of $1.3 billion. The underperformance was mainly due to adverse foreign exchange effects, poor margins and lower sales.

Financials

During the quarter, ExxonMobil generated cash flow from operations and asset sales of $13.9 billion and returned more than $7.7 billion to shareholders through dividends/share purchases. Capital spending during the quarter was $9.3 billion.

Our Take

ExxonMobil shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We believe that ExxonMobil is the world’s best-run integrated oil company given its track record of superior return on capital employed. The company boasts of diversified operations across the world with several new projects coming online through 2013.

Significant exploration successes, with key wells in the Gulf of Mexico (GoM), the Black Sea, Tanzania and Argentina, are believed to be major catalysts going forward. New volume additions are also expected from the U.S., Canada, Kazakhstan, Nigeria, Australia, Russia, Angola and Iraq in the coming quarters. Exxon’s partnership with Rosneft to jointly develop tight oil reserves in Western Siberia will further augment its operations.

However, as access to new energy resources becomes more difficult, ExxonMobil, like most of its peers, will face headwinds in replacing its reserve. Given its large base, achieving growth in oil and natural gas production has been a challenge for the company over the last several years.

ExxonMobil’s largest U.S.-based rival Chevron Corp. ( CVX - Analyst Report ) is scheduled to report its second quarter 2012 results on July 27.