Exxon Mobil’s Asset Sales Boost Quarter Though Low Gas Prices Pinch Upstream Profits

Exxon Mobil (NYSE:XOM) reported a 49% increase in Q2 profits over the same period last year, mainly due to $7.5 billion in gains from asset sales. ^[1] The company reported a sharp drop in upstream earnings in the U.S. on the back of weak natural gas prices and downstream earnings in the U.S. saw an increase because of higher margins. The company reiterated its plans to spend around $37 billion annually over the next five years to boost production. Liquids production dropped by about 6% over the same period last year, mainly due to entitlement volumes, OPEC quotas and divestments.

We have revised our price estimate for Exxon Mobil to $98. The increase in our price estimate reflects our view that the company will be able to reverse the decline in its output with its high capital expenditure program over the next few years. Exxon is already moving to bring new production online in offshore Africa and from oil sands in Canada and unconventionals exploration in the U.S. Exxon will also reduce its footprint in the downstream and marketing businesses which are not as profitable as upstream exploration and production. We have also revised our model to more accurately depict the allocation of capital expenditure across the company’s divisions.

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Upstream drop

The weakness in the North American natural gas market had a visible impact on Exxon’s results in Q2. The company’s upstream earnings from the U.S. dropped from $1.49 billion in Q2 2011 to $0.68 billion in the last quarter. ^[1] The drop was tempered by a $588 million increase in non-U.S. upstream earnings over the same period. Crude oil production fell in almost all major markets expect in Canada. Natural gas production in the U.S. increased by about 1.5% over its levels in Q2 2011 despite a sharp drop in price levels. Worldwide gas production saw a 5% decline over the same period, largely because of lower production in Europe, Africa and Asia.

Exxon announced that it will continue with its capital expenditure program over the next few years. ^[1] Capex for the company has shot up over the past two years as the company has made efforts to reduce the decline in production levels. Capital spending in the upstream sector is expected to rise as companies are forced to explore deepwater and unconventional reserves.

Downstream

Downstream profits rose in Q2 over the same period last year because of restructuring in Japan, which contributed to a bulk of the $6.6 billion in Q2 profits from the division. In particular earnings from the Chemicals division rose 9.7% over their levels in Q2 2011, largely because of the Japanese restructuring. The company’s margins declined in the same period.

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1. Exxon Mobil Corporation Announces Estimated Second Quarter 2012 Results, Exxom Mobil [↩] [↩] [↩]