Exxon Beats but Volume Plunges

U.S. energy behemoth ExxonMobil Corporation’s (XOM - Analyst Report) third quarter 2012 earnings of $2.09 per share (excluding special items) beat the Zacks Consensus Estimate of $1.96 on stronger refining margins and lower costs (down by approximately 7.7% year over year). However, the company stumbled on the production front, generating lower volumes, aggravated by weak commodity prices. Earnings were thus down by almost 2% from the year-ago profit level of $2.13 a share.

Total revenue in the quarter decreased 7.7% year over year to $115.7 billion, but surpassed the Zacks Consensus Estimate of $110.0 billion.

Operational Performance

Upstream: Quarterly earnings of the segment were $6.0 billion, down 28.8% from $8.4 billion a year ago. The decline was primarily due to lower sales volumes and lower oil/natural gas realizations.

Production averaged 3.960 million barrels of oil-equivalent per day (MMBOE/d) in the quarter, down 7.5% year over year. When adjusted for the impact of entitlement volumes and OPEC quota restrictions, production was down by 2.9% from the prior-year quarter.

Liquid production experienced a downfall of 5.9% year over year to 2.116 million barrels per day due to field decline. This was partially offset by the stepping up of Angola and Nigeria ventures.

Again, field decline resulted in the natural gas production slump of more than 9% on an annualized basis.

Downstream: The segment recorded profit of $3.2 billion in the third quarter of 2012 as against $1.6 billion in the year-ago period, mainly due to margin improvement. Asset sale gains and lower operating expenses also contributed to the increase.

ExxonMobil's refinery throughput averaged 4.9 million barrels per day (MMBPD), down by 5.8% from the year-earlier level of 5.2 MMBPD.

Chemical: This unit contributed $0.8 billion to the company’s profits, down from the year-earlier level of $1.0 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 $14.0 billion and returned more than $7.6 billion to shareholders through dividends/share purchases. It also repurchased 58 million shares of its own stock in the third quarter for $5.1 billion. Capital spending during the quarter was $9.2 billion.

Our Take

ExxonMobil shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain 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.

ExxonMobil’s strength is in its balanced operations, strong financial flexibility and continuous improvement on efficiency and cost control. The company’s efforts to build an unconventional resource portfolio both in North America and overseas aims at increasing production through increased exposure to large energy resources with long reserve life and low field declines. Despite the collapse in natural gas prices, ExxonMobil expects unconventional gas to play a dominant role in future supplies owing to the rapid decline in conventional production.

Recently, its Canadian unit − ExxonMobil Canada − agreed to acquire Calgary-based oil and gas driller Celtic Exploration Ltd., in a move towards expanding its footprint in the unconventional energy plays in North America.

Again, in September, the company and its subsidiary, XTO Energy Inc, entered into an agreement with Denbury Onshore, LLC, a subsidiary of oil and natural gas company Denbury Resources Inc. (DNR - Analyst Report), to acquire all of Denbury’s Bakken shale assets. The deal will increase its production in the Bakken oil shale region.

However, we remain skeptical due to the company’s continued disappointing production trend, which decreased for five quarters in a row. We see ExxonMobil struggling to grow production volumes over time.