After Exxon’s Ho-Hum Year Higher Oil Demand Could Lift Results

Exxon Mobil (NYSE:XOM) is scheduled to announce its Q4 2012 earnings on February 1. Last year was largely a disappointment for Exxon’s investors. The company’s top line for the first nine months shrank by more than 2% over the previous year, weighed down primarily by a weak performance in its upstream operations. Only a sharp increase in production volumes will help Exxon make any significant improvement in upstream sales. Downstream sales could see a more marked improvement, thanks to the company’s focus on scaling up refining output. However, net earnings from downstream operations could potentially suffer because of low refining margins.

See our full analysis for Exxon Mobil here

Demand For Crude Is Rising, Can Exxon Catch Up?

The company’s overall sales through 2012, have been hampered by an economic slowdown in key energy consuming regions such as Europe, North America and China. With lower demand, the prices for upstream products such as crude oil and natural gas have remained largely subdued over 2012, leading to lower price realization for Exxon.

However, the latest data from the International Energy Agency (IEA) suggests that global oil demand saw a slight upturn in the last quarter of 2012, with better than expected economic recovery in China leading the way. ^[1] The fourth quarter, or colder months, tend to generate a spike in energy requirements in Europe and North America due to the greater heating demand. However, investors should also keep in mind that average prices for crude oil (Brent, WTI, Alaska North Slope) in Q4 2012, have generally remained in line with the previous quarters.

Meanwhile, the company’s overall production volumes in the Q4 should see a definite improvement over Q3. The output in Q3 was held back by several one-time events including upstream asset divestments and operational downtime. Exxon has been consistently investing in upstream facilities over 2012, and key examples include the Kearl Initial Development Project for natural gas and offshore oil prospects such as the Phobos in the Gulf of Mexico. The country’s focus on shale oil and gas in key North American plays such as Bakken and Marcellus should also play a big part in providing the anticipated rise in volume sales in the final quarter.

A Repeat Of Exxon’s Q3 Downstream Boom Unlikely

Improved results from downstream operations gave Exxon’s investors something to cheer about in the last quarter. The company’s downstream earnings were largely boosted by unexpectedly high refining margins. According to the IEA, refinery margins largely declined over the last three months of 2012, and a repeat of Exxon’s Q3 2012 performance seems unlikely.

We currently have a Trefis price estimate of $98 for Exxon Mobil, which is around 5% above the market price.

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1. “IEA: Modestly higher global oil demand expected in fourth quarter“, Oil&Gas Journal, December 2012 [↩]