The earnings season for the energy industry is in full swing, with oilfield services companies Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) reporting results last week, while the world's largest listed oil company Exxon Mobil (NYSE:XOM) is gearing up to report its third-quarter results before the markets open on Friday, October 28.
Exxon Mobil, like other energy companies, has struggled with declining revenues and earnings in the downturn. So far, the company has consistently reported shrinking profits and revenues for the last seven and eight quarters respectively. The company has made wholesale cuts to its spending levels. For instance, in the second quarter, it slashed its capital expenditure by 38% to almost $5.2 billion. But that wasn't enough to offset the impact of weak commodity prices as revenues dipped to $56.36 billion and profits clocked in at $0.41 per share. Two years ago, the company was generating a profit of more than $2 per share from revenues of more than $105 billion.
But the business environment improved in the third quarter as commodity prices reached some stability. Exxon Mobil, therefore, could show the first signs of a turnaround in the quarterly results.
The price of US benchmark WTI and international benchmark Brent crude averaged almost $45 and $45.85 a barrel, respectively, while natural gas was $2.79 per mcf in the third quarter. The oil prices were still down from 3Q-2015 when WTI and Brent averaged nearly $46.70 and $50.20, depicting drops of 3.7% and 8.7% respectively from 3Q 2015. Natural gas, however, was largely flat, averaging $2.77 in 3Q 2015. Due to weak oil prices, Exxon Mobil will likely report a decline in realized oil price, which will have a negative impact on its upstream profits, on a year-over-year basis. But the drop in earnings will be likely considerably smaller as compared to what we've seen in the previous quarter.
That's because the year-over-year decline in oil prices seen in the third quarter was considerably smaller than the second quarter's. During the three months ended June, WTI, Brent and natural gas averaged around $45.41, $45.83 and $1.95 respectively. That showed a decline of more than 21% for WTI, 26% for Brent, and 27% for natural gas as compared to the average prices of 2Q 2015. Consequently, Exxon Mobil's realized price for oil was $37.97 and $41.46 per barrel at home and abroad, down 29.8% and 28.1% from a year earlier respectively. That pushed the company's US upstream results into the red and drove 85.5% decline in total upstream profits to $294 million. But since the year-over-year decline in profits in the third quarter hasn't been as severe as the second quarter, Exxon Mobil's upstream results won't be as bad.
On top of this, Exxon Mobil can actually post higher earnings on a sequential basis. That's because while oil prices are still weak on a year-over-year basis, they are largely flat on a sequential basis. When compared against the second quarter, the average price of WTI was down just 0.97%, while Brent actually increased 0.04%. This means Exxon Mobil's realized oil price at home and international markets will likely be almost flat from the second quarter. But it's natural gas price that could fuel Exxon Mobil's growth. Remember, Exxon Mobil is also the largest US natural gas producer, ahead of Chesapeake Energy (NYSE:CHK), Southwestern Energy (NYSE:SWN) and Anadarko Petroleum (NYSE:APC). In the second quarter, Exxon Mobil produced 3.1 million cf of gas per day in the US and more than twice as much in international markets, mainly Asia and Europe. Natural gas accounted for 41% of the company's total production. And unlike oil, natural gas prices climbed 43% in the third quarter as compared to the second quarter. That's going to significantly improve the company's realized gas price when compared against the second quarter. With flat oil and considerably higher natural gas price, Exxon Mobil's upstream earnings are well positioned to climb on a sequential basis.
Remember, Exxon Mobil has been posting sequential decline in earnings for the last several quarters (9 out of the last 10 quarters), but profits could rebound in the third quarter. Analysts seem optimistic and are expecting a profit of $0.59 per share, a growth of almost 44% from the second quarter.
Oil price has already gained from the second quarter's average of mid-$40s to current level of $50s. If prices continue to improve, driven by reduction in production from OPEC members and other major non-OPEC oil producers, such as the US and Russia, as well as drawdown of crude oil stockpiles, then Exxon Mobil will likely post further sequential increase in earnings, which will be followed by year-over-year growth.
That being said, Exxon Mobil's third quarter results will also be influenced by how its non-oil-and-gas-producing businesses, such as refining segment, perform. Exxon Mobil is also one of the largest refiners, owning some of the biggest refining facilities in the US. The unit has given crucial support to Exxon Mobil's bottom line in the downturn, since refiners, which use oil as a raw material, usually perform better when oil prices decline. But oil isn't falling anymore. In addition to this, high levels of stockpiles and weak demand of refined products could also negatively impact the refining business. These factors would already be baked into analysts' earnings consensus, but if the refining unit performs worse than expected, then Exxon Mobil could end up missing estimates.
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Disclosure: I/we 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.
Additional disclosure: I own shares of funds that may hold a long position in XOM, SLB, HAL.