Exxon Mobil (XOM) is one of the biggest and most diversified oil and natural gas producers in the world. While Exxon Mobil's earnings are highly tied to the average oil price in a given quarter, the company's earnings can be a good reflection of how well the global economy performed in the last quarter. Any slowdown in the global economy will reflect strongly in Exxon Mobil's income sheet. The company ended the last quarter with a record profit; however, this was mostly due to asset sales rather than increases in oil production.
The company has been suffering from the low prices of the natural gas for a while. Now, the relatively cheap oil prices also added more to such suffering. Of course, these are things outside of the company's control and the company can only try to balance its production levels with the supply levels to minimize the financial damage it may suffer. In the long term, the global energy demand is expected to increase by a large margin, driving the energy prices up; however in the short term, the slowing economy drives a lowered demand across the world.
It's not all about the demand either. Major oil companies are now desperate to find new sources of oil as their reserves will be depleting unless replaced with fresh ones. Most of the conventional oil reserves in the world are already subject to drilling and production. This leaves the oil companies to look at unconventional places and/or methods for oil. Lately, fracking and searching for oil in deep oceans became the new trend among the oil companies.
Of course, it is wrong to blame Exxon Mobil for cheap oil and natural gas prices as well as depleting reserves. It is getting more difficult to find new reserves and Exxon is committed to increase its production capacity. In order to increase the production by 1 million barrels per day, Exxon Mobil is committed to spend another $37 billion on top of its production and research costs.
Exxon Mobil's production rate fell by 5.6% but the fall was mostly due to the limitations in the entitlement volumes based on the company's agreements with a number of sovereign nations. After adjusting for this, the oil production rate was nearly unchanged from the previous quarter for the company. The natural gas production fell at a faster rate than oil production; however, this may not be too bad for the company as natural gas is currently so cheap that it is not that profitable anymore.
Because of these production declines, UBS downgraded Exxon Mobil. Earlier, the company was rated as "buy" but now it will be rated as "neutral." UBS did not like the fact that much of Exxon Mobil's profits came from one-time gains due to asset sales. Currently, Exxon Mobil has one of the highest P/E ratios amongst the giant oil companies and its valuation is being questioned. UBS's price target of $90 for Exxon Mobil is just a few dollars above the company's current share price. Including the one-time gains, the company earned $15.9 billion, which is an all-time high. On the other hand, excluding the one-time gains, the company earned $8.4 billion, which is the lowest in two years.
In the short term, increasing production rates might be pointless for oil companies as the demand isn't very strong at the moment. Exxon would be probably better off by reducing some of its output, particularly the natural gas output until the demand is stronger. In the last quarter, apart from oil and natural gas, the company's chemical products also saw weak demand, particularly in Asia and Europe.
Exxon Mobil will continue to be a profitable company and a decent investment for conservative investors. Those looking for a lot of growth may find it elsewhere at the moment; however, those looking for a stable place to put their money and collect dividends may invest some of their money in Exxon.
Disclosure: I am long XOM.