Exxon Q3 Earnings: Upstream Production & Volume Mix Improving Steadily, But Low Oil Prices Continue To Wreak Havoc On Realizations

Exxon Mobil (NYSE:XOM) released its Q3 2015 earnings report recently. ^[1] Talking about some of the positives for Exxon, increased upstream production, better upstream volume-mix due to higher growth in liquids (crude oil, natural gas liquids, bitumen, and synthetic oil) production, coupled with significantly improved downstream margins were able to partially offset the impact of lower oil prices on the company’s overall performance. However, the low crude oil price environment continues to weigh significantly on both the company’s upstream and downstream operations. Benchmark crude oil prices have declined sharply in 2015 due to rising supplies and falling demand growth estimates and we do not expect any significant recovery in the near term. Consequently, Exxon will continue to operate in a challenging environment for the next few quarters.

Our price target for Exxon Mobil stands at $84, implying a slight premium to the market.

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Upstream Production & Volume Mix Improve, But Realizations Suffer Due To Low Oil Prices

Most of the large integrated oil and gas players have been unable to significantly improve upstream (oil and gas) production over the past decade in the face of natural field declines. Exxon has also suffered a similar fate, and the company’s upstream production has remained relatively flat from 4.21 million barrels of oil equivalent per day (MMBOED) in 2004 to 3.97 MMBOED in 2014. However, going forward, Exxon expects to ramp up its net upstream production to approximately 4.3 MMBOED by 2017 as it progresses on its plan to add roughly 0.8 MMBOED (assuming an average 4% natural decline in production every year) of new production between 2014 and 2017. ^[2] The company is banking on a number of new project start-ups to achieve this target. Exxon has been progressing nicely on its plan to increase production so far, with the company’s total upstream production during the first nine months of 2015 jumping almost 3% to 4.05 MMBOED. ^[3] Additionally, 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 $85.40 per barrel, compared to just around $39.80 realized per barrel of oil equivalent (BOE) of natural gas. This is the reason why the company has been trying to improve the proportion of liquids in its production mix over the past couple of years. As a result, the percentage contribution of liquids to Exxon’s total hydrocarbon production has increased from 51.2% in 2012, to almost 60% in Q3 2015. We expect the company’s volume-mix to sustain this improvement for the full year 2015, as we expect liquids production to grow by 6%, while natural gas production is expected to decline by 2% year-on-year.

The extended period of low crude oil prices has hurt Exxon Mobil’s upstream operations in 2015. Even though the company has increased daily hydrocarbon production, Exxon Mobil’s average price realized per barrel from liquids for the year has dropped drastically and continues to remain below $50. ^[3] The average crude oil price has remained below $60 for the year to date and we believe that prices will not experience any significant recovery for the rest of the year due to the ongoing production related stand-off between OPEC and Non-OPEC producers. Consequently, we believe that Exxon Mobil’s Average Crude Oil & NGLs Sales Price will amount to less than $50 for the year 2015 and will subsequently witness a gradual recovery throughout our forecast period.

Continued Improvement In Downstream Margins

Exxon Mobil’s downstream margins have improved in the recent past because of the improvement in the global refining environment in general, and increased refinery optimization by the company. Exxon’s regular divestment of its non-core assets has also helped, as it has reduced the company’s exposure to less profitable downstream assets. Higher refining margins had propped up Exxon’s downstream operations during the first half of the year and that trend continued during the third quarter, as well. Downstream U.S. GAAP earnings for the year so far have amounted to $3.74 billion, a more than 300% jump over the prior year period. ^[3] This is an impressive result considering both downstream product sales and capacity (refinery throughput) have been down marginally during the same period. Going forward, we expect Exxon’s downstream margins to continue to improve in the near term since we believe that the company will continue to obtain significant efficiency improvements in its refinery business.

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1. ExxonMobil Earns $4.2 Billion in Third Quarter of 2015, October 30, 2015, Exxon Mobil News Release [↩]
2. ExxonMobil Adds New Production; Continues Long-Term Capital Focus and Investment Discipline, March 4, 2015, Exxon Mobil News Release [↩]
3. Exxon Mobil’s SEC Filings [↩] [↩] [↩]