Exxon’s Q3 Earnings Rise Despite Lower Crude Oil Prices

Exxon Mobil’s (NYSE:XOM) third quarter earnings grew over last year, as thicker downstream margins more than offset the impact of lower crude oil prices on its upstream operations. The company’s diluted earnings per share (EPS) increased almost 5.6% year-on-year to $1.89. Exxon’s crude oil price realizations fell 10%, compared to the previous year’s quarter on lower benchmark prices. Global crude oil benchmark prices have fallen sharply over the past few weeks on rising supplies and slower demand growth, especially from China, where the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. However, thicker downstream margins more than offset the impact of lower crude oil prices, reflecting the inherent strength of the integrated business model in times of volatile commodity prices. For the full year, we expect Exxon’s earnings to grow marginally on better upstream volume-mix and thicker downstream margins, partially offset by lower crude oil prices. ^[1]

Exxon Mobil is the world’s largest publicly traded international Oil and Gas Company. It generates annual sales revenue of more than $420 billion with a consolidated adjusted EBITDA margin of ~14.7% by our estimates. Based on the recent earnings announcement, we have revised our price estimate for Exxon Mobil to $103/share, which values it at around 13.7x our 2014 GAAP diluted EPS estimate of $7.54 for the company.

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Better Upstream Volume-Mix

Hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen and synthetic oil, and natural gas. Liquids are generally more profitable to produce than natural gas because of higher price realizations. Last year, Exxon sold liquids at an average price of around $95 per barrel, compared to just around $41 realized per barrel of oil equivalent (BOE) of natural gas. The proportion of liquids is therefore a key driving factor for cash margin earned by exploration and production companies per barrel of oil equivalent. Therefore, Exxon has been trying to improve the proportion of liquids in its production mix over the last couple of years by slowing down its shale gas development program in the U.S. Last year, liquids made up 52.7% of Exxon’s total hydrocarbon production, up from 51.5% in 2012. This year, we expect the proportion of liquids to rise further.

During the first nine months of this year, Exxon’s total liquids production decreased by 104,000 barrels per day, or almost 4.8% y-o-y, primarily due to the expiry of the Abu Dhabi onshore concession agreement. The company lost its 75-year rights to the emirate’s oldest producing fields this January, when the Second World War-era contract expired. However, excluding the impact of the Abu Dhabi onshore concession expiry, Exxon’s liquids production actually increased by 1.4% y-o-y during the fist three quarters of this year. On the other hand, its natural gas production declined by more than 700 million cubic feet per day, or almost 5.8% y-o-y over the same period. Although, lower weather-related demand in Europe exaggerated the decline in its natural gas production during the first quarter, we expect the overall trend of improving volume-mix to continue for the rest of the year. The company expects its liquids production to grow by ~2% y-o-y and natural gas production to decline by around 3% for the full year. This is expected to drive better price realization per barrel of oil equivalent and improve its unit profitability. ^[2]

Thicker Downstream Margins

Exxon’s downstream margins improved significantly during the third quarter on lower benchmark crude oil prices and supplier discounts. Because of the sharp increase in crude oil production in the U.S., primarily because of increased tight oil development, imports by the world’s largest oil consuming nation have been declining recently. As a result, oil exporting countries like Saudi Arabia are looking for buyers elsewhere and offering discounts to benchmark prices in order to their retain market share. ^[3] This oversupply scenario is benefiting refineries in Europe and Asia because of which, Exxon’s third quarter international downstream earnings increased by more than a 100% year-on-year. We expect a similar performance during the fourth quarter to boost its full-year downstream EBITDA margins. ^[2]

However, in the long run, we expect global refining margins to continue to remain under pressure due to industry overcapacity, which stems from the fact that governments in different parts of the world are willing to run uncompetitive crude refineries at very low or no returns to sustain employment and reduce their reliance on imported fuels. We currently forecast Exxon’s adjusted downstream EBITDA margin to improve marginally to around 2.1% in the long run, which is more than 20 basis points below the historical average by our estimates. (See: Key Trends Impacting Global Refining Margins)

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More Trefis Research

1. Exxon Mobil Corporation 3Q14 Press Release, exxonmobil.com [↩]
2. Exxon Mobil Corporation 3Q14 Earnings Presentation Slides, exxonmobil.com [↩] [↩]
3. NWE Refinery Margins Surge To 18-Month Highs As Crude Oil Prices Plummet, platts.com [↩]