Exxon Mobil’s Earnings Down On Thinner Margins, Lower Volumes

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Exxon Mobil

Exxon Mobil’s (NYSE:XOM) second quarter earnings were down significantly on lower volumes, thinner margins and certain non-operating items. Reported earnings per share (EPS) at $1.55 declined 55% primarily due to the gains realized on asset sales and other items affecting comparability with prior year period. However, EPS adjusted for these items was down 14% for the quarter.

Despite lower production during the first half, company officials maintained their production outlook for the full year as shared during the analyst meet in March with a clear focus on improving the proportion of liquids (primarily crude oil and natural gas liquids). [1]

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Thinner Margins

Exxon’s downstream earnings were down to just ~$400 million compared to more than $6.6 billion in the prior year period. Most of this decline was due to the absence of gains from restructuring of Japan operations last year. However, even after adjusting for items affecting comparability year-on-year, the company’s earnings from selling gasoline and other refined products declined ~70% or ~$900 million. The sharp decline in adjusted earnings can be attributed to heavy planned maintenance activities at its refineries and a narrower WTI-Brent spread. The company executives told analysts on the conference call that almost 9% of Exxon’s refining capacity was offline during the quarter due to maintenance activities, which is usually in the 4-5% range.

While the impact of capacity downtime due to maintenance is expected to reverse in the later half of the year, a shrinking WTI-Brent spread might continue to put pressure on refining margin comparisons. Despite being slightly better in quality, the WTI crude traded at significant discount to the European Brent Crude over the last couple of years, primarily due to limited storage and pipeline capacity amid growing supply from unconventional sources. Cheaper WTI crude boosted operating margins of Exxon’s downstream operations significantly last year, as gasoline and diesel prices remained relatively unaffected. However, the WTI-Brent spread that averaged ~$20 per barrel during the second half of 2012, has shrunk significantly during the last one month and currently stands at around $4.5 per barrel.

Lower Volumes

Exxon’s upstream earnings adjusted for non-operating items were up marginally on better natural gas realizations, partially offset by the negative impact of lower crude oil prices and unfavorable volume mix. Though lower production volumes (down ~2%) remained a drag on upstream revenues. For the first half, liquids and natural gas production has been down by almost 1% and 4.5% y-o-y respectively. However, The company reiterated its production outlook for the full year to be down by just 1% as growth in liquids is expected to partially offset the decline in natural gas production.

Liquids Key To Future Growth

Amid depressed natural gas prices in North America, energy companies are increasingly focusing on boosting production of liquids to realize better margins. Exxon Mobil is no exception to this trend. The $31 billion XTO acquisition made by the company in 2010 made it the biggest natural gas producer in the U.S. However, natural gas prices have tumbled significantly since then and have weighed on the company’s upstream earnings. Exxon is therefore focusing on increasing its liquids production by more than 1 million barrels of oil per day by 2017. [2] The company’s performance on this target is critical to its future earnings growth, and therefore, we will be watching it very closely.

We have updated our price estimate for Exxon Mobil to $91 based on the second quarter earnings release.

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Notes:
  1. Exxon Mobil Corporation Announces Estimated Second Quarter 2013 Results, exxonmobil.com []
  2. Exxon Mobil Corporation 2013 Analyst Meeting, ir.exxonmobil.com []