4 Takeaways From Exxon’s Earnings Release

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have been taking a hard look at Exxon’s (NYSE: XOM) quarterly filing of estimated third quarter results.  Overall, Q3 2012 results have been less than in Q3 2011.  However, the report did point to a few key overarching trends that are indicative of the energy industry.  Below are the four major takeaways from the energy industry that I grasped from Exxon’s filing.

Declining Upstream Profits

The upstream energy market spans initial exploration to bringing fuels out of the ground.  First, it covers searching for underground and underwater well sites, then drilling the exploratory wells.  Also, the upstream segment includes operating (ongoing) drilling to bring oil and natural gas to the surface.  Exxon’s results are as follows.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Third   Quarter</strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>Nine   Months</strong></p> </td> <td> <p><strong> </strong></p> </td> </tr> <tr> <td> <p><strong>Earnings (U.S. GAAP)</strong></p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>2011</strong></p> </td> </tr> <tr> <td> <p><strong>Upstream</strong></p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p><strong>US</strong></p> </td> <td> <p>                 633</p> </td> <td> <p>             1,184</p> </td> <td> <p>               2,321</p> </td> <td> <p>               3,912</p> </td> </tr> <tr> <td> <p><strong>Non-US</strong></p> </td> <td> <p>                5,340</p> </td> <td> <p>             7,210</p> </td> <td> <p>             19,812</p> </td> <td> <p>             21,698</p> </td> </tr> <tr> <td> <p>Numbers in Millions, from Exxon's November 1 Filing</p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> </tbody> </table>

The results show reduced upstream earnings.  I think this is the likely result of the industry moving from natural gas drilling to more profitable oil drilling.  Low natural gas prices have spurred the change.

When making the switch, oil giants have to move rigs, survey the drilling sites, and make sure that all permits are in place.  This takes time.  I expect profits from upstream segments to increase after the energy industry has completed the switch to increased oil drilling.

Increasing Downstream Profits

For this article, I am combining the midstream and downstream processes into just downstream.  Midstream processes include gathering energy from the well sites and moving it to processing plants.  When processing natural gas, for example, firms can make money by parsing the natural gas into dry natural gas (methane) and the heavier natural gas liquids (NGLs, different from Liquid Natural Gas, or LNG).  NGLs include substances like butane, propane, isobutene, and ethane.  Companies make money breaking up the substances, transporting them, and distributing them.

Downstream processes include distributing and selling petroleum-based products, like gasoline, diesel fuel, jet fuel, and other types of fuel oils.  The downstream process reaches consumers across a variety of industries, including fertilizers, pharmaceuticals, plastics, energy products, lubricants, and asphalt.  Exxon’s results are as follows.  The numbers have largely increased, a testament to the world’s dependency on petroleum-related products.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Third   Quarter</strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>Nine   Months</strong></p> </td> <td> <p><strong> </strong></p> </td> </tr> <tr> <td> <p><strong>Earnings (U.S. GAAP)</strong></p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>2011</strong></p> </td> </tr> <tr> <td> <p><strong>Downstream</strong></p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p><strong>US</strong></p> </td> <td> <p>                1,441</p> </td> <td> <p>                810</p> </td> <td> <p>               2,878</p> </td> <td> <p>               2,238</p> </td> </tr> <tr> <td> <p><strong>Non-US</strong></p> </td> <td> <p>                1,749</p> </td> <td> <p>                769</p> </td> <td> <p>               8,544</p> </td> <td> <p>               1,796</p> </td> </tr> <tr> <td> <p>Numbers in Millions, from Exxon's November 1 Filing</p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> </tbody> </table>

Major Investment

Like other firms, Exxon has been investing heavily.  Exxon’s Q3 capital and exploration expenditures, for example, reached a new high of $9.2 billion and a record $27.4 billion through the first nine months of 2012, according to Exxon’s quarterly filing.

Exxon is not the exception.  ConocoPhillips (NYSE: COP) and BP (NYSE: BP) are also investing major amounts to secure new drilling sites.  These two firms and Exxon, for example, have joined to invest up to $65 billion in Alaska’s North Slope.  The aim is to export energy products to countries like Japan, Korea, China, and India.  While some target countries don’t have free trade agreements with the U.S., these nations command higher natural gas prices, because natural gas prices are somewhat tied to oil in those regions.

Acquisitions and Divestitures

On September 19, Exxon announced an agreement with Denbury Resources (NYSE: DNR) to buy Denbury’s entire Bakken shale holdings.  The assets comprise 196,000 net acres spanning Montana and North Dakota.  After the deal closes, expected production is to be more than 15,000 net oil-equivalent barrels per day, according to Exxon’s filing.

Again, asset buys and sales are happening across the board.  Another example is Chesapeake (NYSE: CHK).  Chesapeake has been a major player in the market, selling its rich natural gas assets to fund its cash flow deficiencies and its growing investments. 

According to Chesapeake’s November 2012 Investor Presentation, Chesapeake raised its 2012-2013 asset sales goal to $17-19 billion.  And spanning August through October 2012, the company sold $6.9 billion of assets in the Permian Basin, as well as other asset and midstream sales.

Finally, BP is also in the mix, swapping assets in the Russian marketplace.


Exxon’s latest filing reveals decreased upstream earnings and higher downstream earnings.  Also, the company has seen heavy investments, likely to produce higher-profit oil instead of natural gas, and acquisition activity.

Exxon’s actions are not happening in a vacuum.  The industry is taking similar paths toward increased efficiency, cash flow management, and profitability, making Exxon a good indicator of new industry norms.




ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Denbury Resources and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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