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ExxonMobil Corporation’s (XOM - Analyst Report) fourth-quarter 2012 earnings of $2.20 per share (excluding special items) beat the Zacks Consensus Estimate of $1.99 by 10.6%. Earnings also improved 11.7% from last year's $1.97. The improved performance reflects stronger refining margins and lower costs (down by approximately 6.8% year over year).

Total revenues in the quarter decreased 5.3% year over year to $115.2 billion, but surpassed the Zacks Consensus Estimate of $114.4 billion.

Full year 2012 adjusted earnings came in at $9.70 per share, beating the Zacks Consensus Estimate of $7.86 and up 15.2% from $8.42 a year ago.

Total revenues in 2012 decreased marginally by 0.8% to $482.3 billion on an annualized basis. However, it was ahead of our projection at $461.4 billion.

Operational Performance

Upstream: Quarterly earnings for the segment were $7.8 billion, down 12.1% from $8.8 billion a year ago. The decline was primarily due to lower sales volumes and lower liquid realizations. These were partly mitigated by improved natural gas realizations.

Production averaged 4.293 million barrels of oil-equivalent per day (MMBOE/d) during the quarter, down 5.2% year over year. When adjusted for the impact of entitlement volumes and OPEC quota restrictions, production was down by 2.1%.

Liquid production declined 2.1% year over year to 2.203 million barrels per day due to field decline. This was partially offset by the stepping up of West African ventures along with lower downtime.

Moreover, the field decline resulted in the natural gas production slump of more than 8% on an annualized basis.

Downstream: The segment recorded profit of $1.8 billion in the fourth quarter of 2012 against $0.425 billion in the year-ago period, mainly due to margin improvement.

ExxonMobil's refinery throughput averaged 4.8 million barrels per day (MMBPD), down 7.9% from the year-earlier level of 5.3 MMBPD.

Chemical: This unit contributed approximately $1.0 billion to the company’s profits, up 76.4% from the year-earlier level of $0.5 billion. The outperformance was mainly attributable to higher margins.

Financials

During the quarter, ExxonMobil generated cash flow from operations and asset sales of $14.0 billion. In 2012, the company returned more than $30 billion to shareholders through dividends/share purchases. It also repurchased 59 million shares in the fourth quarter for $5.3 billion. Capital spending during the quarter surged 24% year over year to $12.4 billion.

Our Take

We believe that ExxonMobil is the world’s best-run integrated oil company, based on its track record of superior return on capital employed. The company boasts 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 the future supplies, owing to the rapid decline in conventional production.

Amongst the integrated super majors, ExxonMobil and Chevron Corporation (CVX - Analyst Report) beat the Zacks Consensus Estimate, but Royal Dutch Shell plc (RDS.A - Analyst Report) delivered weaker-than-expected fourth-quarter 2012 earnings. BP Plc (BP - Analyst Report) will release results next week.

However, we remain skeptical due to the company’s continued disappointing production trend, which decreased for 6 quarters in a row. The company stumbled on the production front, generating lower volumes, aggravated by lower liquid price realization. We see ExxonMobil struggling to grow production volumes over time.

ExxonMobil currently retains a Zacks Rank #3 (Hold).

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