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Can ExxonMobil's (XOM) Upstream Operations Aid Q4 Earnings?

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Exxon Mobil Corporation XOM is geared up to release fourth-quarter 2019 results on Friday, Jan 31. While the downstream side of the picture appears rather bleak, sentiments across the upstream division are moderately boosted by high production.

(See more in ExxonMobil to Report Q4 Earnings: What's in Store?)

Upstream Business

ExxonMobil’s core operations include upstream businesses. This segment reflects the company’s activities related to exploring, and developing prospective oil and natural gas resources.

From upstream operations, both within and outside the United Sates, the firm reported earnings of roughly $8.3 billion in the first nine months of 2019. The profit represents almost 77.8% of total earnings garnered from its three segments during the said period.

Upstream Performance in Q3

Non-U.S. Operation: During third-quarter 2019, ExxonMobil reported earnings of $2.1 billion from upstream activities outside the United States. This marked a decline from the year-earlier profit of $3.6 billion.

U.S Operation: From domestic operations, ExxonMobil reported profits of $37 million, lower than the year-ago quarter’s $606 million.

The decline in the metrics on a year-over-year basis was primarily caused by lower price realizations of commodities. This was partially offset by higher year-over-year production volumes, especially in the Permian Basin.

Q4 Oil & Gas Prices

Ramped-up production from U.S. shale resources, especially in the Permian, and weak global crude demand are expected to have impacted commodity prices in the fourth quarter. Through the December quarter of 2019, price of West Texas Intermediate averaged $56.96 per barrel, lower than the year-ago level of $59.08. Similarly, Brent crude averaged $63.41 per barrel, lower than the year-ago quarter’s $67.71. Moreover, natural gas prices also stayed significantly lower in the December quarter than fourth-quarter 2018 levels, owing to continued pressure from excess supply and declining demand growth. The drop in commodity prices is likely to have clipped ExxonMobil’s fourth-quarter 2019 profit from upstream operations.

Forecast for Q4 Oil & Gas Production

The Zacks Consensus Estimate for fourth-quarter production is pegged at 4,044 thousand barrels of oil equivalent per day (MBoe/d), suggesting an improvement from the year-ago period’s 4,010 MBoe/d.

Production of Crude & Natural Gas Liquids: The consensus estimate for overall crude oil and liquids production is pegged at 2,429 thousand barrels per day (MBPD), indicating an improvement from 2,348 MBPD in the year-ago period, which can be attributed to rising Shale output.

Natural Gas Production: The Zacks Consensus Estimate for overall natural gas production available for sale is pegged at 9,689 thousand cubic feet per day (Mcf/d), implying a decrease from 9,974 Mcf/d in fourth-quarter 2018.

Upstream Results to Deteriorate in Q4

Prices and production of oil and natural gas are the two key parameters that determine the fate of upstream operations.

Non-U.S. Operation: The Zacks Consensus Estimate for earnings after taxes from non-U.S. upstream operations is $2.3 billion, pointing to a decline from $3.1 billion reported in the year-ago quarter.

U.S. Operation: The Zacks Consensus Estimate for after-tax gains from upstream operations in the domestic region is pegged at $257 million, which indicates fall from $265 million reported in the year-ago quarter.

Our Take

We expect the upstream business of ExxonMobil — a Zacks Rank #3 (Hold) stock — to come up with lower-than-expected year-over-year results in the fourth quarter due to weak pricing scenario of oil and natural gas. This will likely be partially offset by higher hydrocarbon production volumes. However, whether production from the upstream business will lead to an earnings beat is something investors will have to wait and watch. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings & Revenue Projections

The Zacks Consensus Estimate for fourth-quarter earnings of 44 cents per share suggests a decline of 70.9% year over year. Also, the Zacks Consensus Estimate for sales of $69.1 billion indicates a 3.9% year-over-year decrease.

Earnings Schedule for Other Major Energy Players

Royal Dutch Shell plc is scheduled to report fourth-quarter 2019 results on Jan 30. Integrated energy players like Chevron CVX and BP plc BP are set to report quarterly results on Jan 31 and Feb 4, respectively.

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