Despite a slump in upstream production and flagging energy prices, Exxon Mobil‘s (NYSE:XOM) earnings grew in its latest Q4 2012 results declared on February 1. Net earnings for the quarter stood at $9.95 billion, an increase of $550 million or 6% from the same period in 2011. The company’s positive results were largely helped by a steady improvement in downstream refining margins as well as volume gains in refined products.
Flagging World Economy And Low Output Volumes Weigh On Upstream Sales
Energy prices have remained quite low over 2012 with economic weakness in North America, Europe and China leading to a stagnation in world demand for fossil fuels. The average price realized by Exxon on oil and oil products, in particular, have been markedly lower in 2012, severely impacting its upstream revenues.
The trend continued in the final quarter with upstream earnings at $7.76 billion, down $1.0 billion from the fourth quarter of 2011. The Q4 downturn in upstream operations was further weighed down by lower volume output. On an oil-equivalent basis, upstream production decreased 5.2% over Q4 2011. Liquids production was down by 1.4% while gas production was down by 2.8%.
For the full year 2012, Exxon’s upstream earnings stood at around $30 billion, 4.5 billion lower than the previous year’s. Investors should also note, however, that the company’s upstream performance in Q4 2012 was a significant improvement over the previous quarter with earnings up by $1.78 billion, or around 30%. This growth is largely a result of higher volumes due to reduced operational downtime and seasonal demand in Europe due to winter heating requirements.
Strong Downstream Margins Boost Earnings Again, Chemical Margins Decline
Exxon saw a sharp upturn in downstream margins in Q3 2012, and it was again in the downstream segment that Exxon saw the strongest growth in Q4 2012. Earnings in the segment stood at about $13 billion for the quarter. Margins contributed $2.6 billion to Q4 2012 earnings while volume and product mix contributed $200 million. The rest of the higher growth was mostly a result of the company’s divestment of key downstream assets, primarily in Japan.
Meanwhile, Exxon’s chemicals segment saw both margins and volume sales dip towards the year end. This segment’s earnings for Q4 2012 finished at around $3.9 billion, a decrease of about $485 million compared to Q4 2011. Margins decreased earnings by $440 million while the rest can be attributed to a volume decline.
A quick view of Exxon’s performance over Q4 2012 might shake the investors’ belief in the company’s ability to drive volume production in the near future, a key assumption in our $98 valuation for the company’s stock.
However, with increasing spend on exploration and several ongoing projects (primarily in non-conventional crude in the Gulf of Mexico, Newfoundland and various sites across South America and Russia), we have reason to expect that the company can deliver in the coming few months. Exxon’s focus on shale plays in various regions across the globe including Eastern Europe, South and North America should further boost its natural gas production in the next few years.
We currently have a Trefis price estimate of $98 for Exxon Mobil, which is around 5% above the market price.
Disclosure: No positions