ExxonMobil's Earnings Hit By Lower Production Volumes
ExxonMobil reported a slight increase in fourth-quarter earnings as the benefit of higher prices was largely outweighed by the drop in production and contraction in refining and chemical margins.
Market Update
ExxonMobil (XOM) reported a slight increase in fourth-quarter earnings as the benefit of higher price realizations was largely outweighed by the drop in production volumes and contraction in refining and chemical margins. The sharp drop in production, albeit including the effects of divestments and OPEC curtailments, will probably focus investor attention on the challenges Exxon is facing in driving production growth. While we certainly think the environment is becoming more challenging for the company, we hesitate to draw too many conclusions from one quarter. With a queue of projects slated for startup over the next few years, we expect Exxon can reverse some of the production declines. However, given that investment levels continue to rise as production wanes, execution and on-time delivery will be critical to demonstrate the value of past investment. Also, growth will need to emerge from areas other than U.S. natural gas, where low prices are probably weighing on returns.
Upstream earnings increased to $8.8 billion from $7.5 billion the year before, also reflecting the benefit on asset sales gains. Production volumes slipped significantly during the quarter, falling almost 9% from the same period a year ago. Liquids production fell about 11% as a result of OPEC quota effects, divestments, and natural field decline. Natural gas dropped 7% partially as a result of field decline and lower demand in Europe. However, U.S. natural gas production growth continued with volumes rising 3.5%. For the full year, Exxon increased production a little over 1%, with liquids volumes falling almost 5% and natural gas volumes increasing over 8%, primarily in the United States.
Downstream earnings registered similar declines to those of Exxon's integrated peers. For the fourth quarter, downstream segment earnings were $425 million, compared with $1.2 billion in the same period last year and $1.6 billion in the third quarter of 2011. The margin weakness during the quarter extended to the chemicals segment as well, where fourth-quarter earnings of $543 million were well below the $1.1 billion earned last year. Both segments probably saw their low points during the fourth quarter, and we would expect earnings to bounce back in the first part of 2012, though likely not to the levels of the second and third quarters of 2011.
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