Exxon Mobil’s Higher Production Capacity Could Offset Weaker Prices In Earnings

Exxon Mobil (NYSE:XOM) is scheduled to announce its third quarter earnings on November 1. The oil & gas supermajor had a disappointing previous quarter, which it attributed to lower energy prices. We believe that a similar trend in energy prices will have a negative impact on this quarter’s results as well, although this could be offset by production capacity increases through major project startups and acquisitions. On the downstream side, we expect higher refining margins due to a supply shortfall. This could have a positive impact on the segment’s performance.

See our full analysis for Exxon Mobil

Upstream revenues face offsetting forces

Considering the trends in average market prices for crude oil (Brent, WTI, Alaska North Slope) and natural gas (Henry Hub and British NBP), we expect Exxon Mobil’s average price realization for energy to be lower than the same quarter in the prior year.

On the other hand, oil & gas production capacity has been boosted through a number of projects, including the Angola Kizomba Satellites Phase 1 project, which achieved first oil last quarter. The project is currently in the ramp up phase and will probably achieve peak production sometime next year. The firm has also recently acquired a large portion of shale reserves in the Bakken through a deal with Denbury Onshore. It is investing heavily into a number of shale reserves in the US, including the Bakken and Marcellus. Nevertheless, depressed oil & gas prices may force the company to reduce production in order to maintain economic feasibility. In the long term however, we expect a gradual increase in oil production based on upcoming project startups and exploration and development plans.

Downstream production expansion and higher refining margins

Exxon is also expanding a number of its downstream assets in the U.S. in order to take advantage of low natural gas based feedstock prices. It recently announced expansion plans for its Louisiana petrochemical plants, and is also considering the expansion of its Baytown refinery.

Based on BP’s recent earnings release, we expect refining margins this quarter to be unusually high, primarily due to a shortfall in fuel supply and low global gasoline and diesel inventories. This will have a positive impact on downstream profits.

We currently have a Trefis price estimate of $98 for Exxon Mobil, which is around 10% above the market price.

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