Refining Margins Save Exxon Mobil’s Earnings As Lower Energy Prices Cloud Outlook

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Trefis
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Exxon Mobil

Exxon Mobil (NYSE:XOM) reported its third quarter earnings on November 1. The oil & gas supermajor had a weak quarter with declining production and lower energy prices hurting upstream earnings. However, overall earnings beat most consensus estimates, boosted by strong performance from the downstream division due to unusually high refining margins.

Upstream performance hit by lower production volumes and prices

Adjusted oil-equivalent production, which excludes the impact of entitlement volumes, OPEC quota effects and asset divestments, fell almost 3% on a y-o-y basis. The decline can be attributed to asset divestments and downtime in Kazakhstan and the North Sea, partially offset by project ramp-ups in Nigeria and Angola.

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Oil price realizations also fell relative to the prior year quarter, primarily due to declines in Chinese and European oil consumption. The shale gas revolution in the US has kept natural gas prices in the country depressed compared to last year while price realizations on International natural gas sales increased due to higher global consumption of the fuel. The overall weighted average of natural gas price realizations stood at around $7 per million cubic feet this quarter, a slight decline compared to the prior year quarter. Going forward, we expect natural gas price realizations to increase, primarily driven by growing global consumption.

See our full analysis for Exxon Mobil here

Weak upstream performance was largely offset by strong growth in downstream revenues and earnings driven by higher refining margins. Margins have been unusually high in the third quarter, owing to refinery closures in the Atlantic basin and a shortfall in global gasoline and diesel inventories. We believe that it will be difficult for the company to realize such high refining margins going forward.

Production volumes will increase going forward

Although net production was lower this quarter relative to the prior year, we think there will be a significant increase in production in coming quarters. We base this expectation on an increase in upstream capital expenditures and a large number of project startups globally.

Capital expenditures grew 7% to $9.2 billion this quarter and Exxon expects annual capital expenditures of around $37 billion over the next five years. The bulk of these expenditures will go towards the upstream segment. The firm is currently involved in several large scale projects, including the development of a number of shale fields in the US, such as Bakken and Marcellus, and is also working with Russian oil major Rosneft in the exploration and development of resources in the Kara Sea and the Black Sea.

Further, a number of projects are in the initial phases of starting up, including the Kearl oil sands project in Canada, which is expected to produce 500 thousand barrels per day of diluted bitumen at full development and the Angola and Nigeria projects, which are currently in the ramp up phase.

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

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