Exxon Mobil (NYSE:XOM) reported earnings $7.9 B for Q3-2013, down 18% from a year earlier. As earnings for Q2 were down 14% year on year (Y/Y), one might wonder whether there is any positive in this quarter or year. The answer is that the quality of earnings is much better in this quarter than in the previous quarter.
An upstream company like Exxon, which generates about 80%-90% of its net income from the upstream sector, is supposed to exhibit excellent performance in this sector. Unfortunately, in the last several quarters Exxon reported continuously declining production volumes and did not take full advantage of the prevailing high oil prices. However, in today's report, the company announced a 1.5% production increase in Q3. Even better, excluding the impact of uncontrolled factors (OPEC quota etc.), the total production growth was 2.7% and growth in the most profitable part (liquids) was 5.3%. This improved execution raised the upstream earnings by 12% Y/Y.
On the other hand, the disaster in this quarter came from the near record-low refining margins, which resulted in an 80% reduction in the earnings from the downstream sector. This is the reason for the above mentioned 18% decline in the earnings of the company in Q3-2013 vs. Q3-2012. However, as the refining margins are globally determined by the balance of supply and demand, they are completely out of the control of the company. Therefore, no-one can blame the company for the cause of the decline in its earnings this time.
Unfortunately, the weak refining margins have been the prevailing trend for the last 5 years and there is hardly any evidence of optimism at the moment. However, as the refining sector is cyclical, the margins may improve in the future. Moreover, a premium company like Exxon, which is focused on the upstream sector, is expected to outweigh this headwind with its great performance in the upstream. Therefore, while I advise investors to stay away from downstream companies, I believe that Exxon is well positioned for long-term growth.
Another discouraging part from the report was the reduced rate of share repurchases, which however was not surprising because it showed up in the report of Q2 as well. Exxon repurchased 0.77% of its shares in Q3, which corresponds to an annual rate 3%, much lower than the 5% that was maintained for the last 3 years. As explained in my previous article for Exxon, the most probable reason for the reduced buybacks is that the company projects that it will not have the sufficient earnings to support its capital investments and maintain its generous distribution to its shareholders.
To sum up, this has not been a great year for Exxon, as the earnings per share have fallen 27% in the first nine months. However, this is the first quarter in which the company reports very good performance in its field of specialty (the upstream sector) and hopefully sets the base for improvement in performance for the following quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.