Big Oil Takes One on the Chin

The Big Oil gang has started to report earnings, with ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , and ConocoPhillips (NYSE: COP  ) reporting last week. At first glance, it's somewhat surprising that Chevron managed to eke out a gain, while Exxon's results slid year over year on lower crude prices. But if you back out one-time items, Chevron also suffered a slippage.

Let's take a look at the different companies' respective results and try to find some good news that might benefit us in the year ahead.

The biggest goes first
In spite of Exxon's fourth-quarter dip in earnings, full-year earnings were an all-time corporate record of $45.2 billion. That's up 11% from the prior record of $40.6 billion in 2007.

During the quarter, net income fell to $7.8 billion, or $1.55 a share, versus $11.7 billion, or $2.13 a share a year earlier. With crude prices sliding by about 60% from September through December, the upstream contribution to the company's total fell $2.6 million to $5.6 million. At the same time, its oil-equivalent production dropped by 3% in the quarter, never a good sign for an exploration and production company.

The downstream (refining and marketing) sector did better, with stronger margins leading to about a 6% earnings improvement. The gain occurred despite a loss for the sector in the U.S. of $20 million.

Exxon's capital and exploration expenditures grew by 11% to $6.8 billion during the quarter. At the same time, the company bought back another 119 million shares of its common stock, spending $8.8 billion in the process.

Finally, Exxon has announced that it will spend in excess of $1 billion in three big refineries in the U.S. and Europe, raising its production of diesel fuel by six million gallons per day.

Chevron's special items benefits
And then there was Chevron. The company's net income improved to $4.90 billion, or $2.44 per share. That's up from up from $4.88 billion, or $2.32 a share in the fourth quarter of 2007. However, the most recent quarter included a $600 million gain on an asset exchange transaction, along with $478 million in currency exchange. Without those items, the consensus expectation was $1.82 a share, far lower than a year ago.

In the exploration and production segment, Chevron generated $3.2 billion, a decline of $1.7 billion from the comparable quarter of 2007. But downstream, in light of the expanding margins mentioned above, Chevron earned $2.1 billion, more than a ten-fold increase from the final quarter of 2007.

Unfortunately, however, Chevron's oil-equivalent production was 619,000 barrels a day, down 111,000 daily barrels from the year-ago quarter. Nevertheless, there was a reason for the drop: About three-quarters of the total was related to the September hurricanes in the Gulf of Mexico.

ConocoPhillips, as expected
Friday's Exxon and Chevron results followed the earlier release of results from ConocoPhillips, which, as I earlier had forecast to my Foolish friends, included $34 billion in asset writedowns, as plummeting crude prices took their toll on the values of several of the company's prior-years' acquisitions. Included was a $25.4 billion trimming, primarily relating to the value of the company's 2006 purchase of Burlington Resources, and a $7.4 billion writedown of the company 20% stake in Russia's giant oil company, Lukoil (OTC BB: LUKOY).

Without all these one-time items, Conoco would have checked in with earnings of $1.9 billion, or $1.28 a share.

What's ahead for the sector?
So, on a purely operating basis, the world clearly has become tough on the producers, as compared, for instance, to the bigger oilfield service companies Schlumberger (NYSE: SLB  ) , Weatherford (NYSE: WFT  ) , and Halliburton (NYSE: HAL  ) , all of which reported respectable results. Given the structure of the energy industry, however, those companies all will take longer to reflect lower oil and gas prices than have their producer customers.

Most of 2009 will perpetuate hard times for the producer and service contingents alike. Nevertheless, abandoning the sector completely would be foolhardy. Indeed, commodity price turnarounds could occur as quickly as did the beginning of the skids in July. As a result, I'm still most interested in ExxonMobil, the biggest of Big Oil and an ideal proxy for the overall industry.

ExxonMobil has been rated a four-star company by Motley Fool's CAPS players. Why not weigh in with your thumb pointed either up or down?

For related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does welcome your questions or comments. The Motley Fool has a well-oiled disclosure policy.


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  • Report this Comment On February 03, 2009, at 4:39 PM, Balcombie wrote:

    I suppose this is a decent job of reporting the news but hardly insightful commentary. Just as I don't drive down the highway looking in the rear-view mirror, telling me about Q408 when oil prices averaged $20/b higher than now isn't really that relevant.

    Why do you think owning XOM into the future is such a great idea?

    1) Is is because you believe its dividend is secure no matter what oil price prevails over the next two years? If so, that is a defensive call. You should define it as such and defend it.

    2) Is it because you imagine XOM will be a leader when oil prices turn and rise higher again? If so you should make this clear and explain how you imagine XOM will out grow its peers in the future.

    My two cents: Number one is at least debatable going into 2010; number two is definitely wrong as a cursory look at past stock performance will indicate.

    Regarding #1: cap-ex of $26 billion; stock buy-back of $28 billion; dividend of $7 billion. Total: $61 billion. Do some homework and figure out how much free cash XOM actually generates at $30/b; $40/b; $50/b. Make a guess at where oil prices will be in 2010. Realize that consumption upon recovery is unlikely to be the same as it was in 2008 in the absence of loose credit (however you are certainly free to disagree). Then ask yourself if XOM will generate enough free cash to cover a $61 billion bill. If not, how will they cover the shortfall?

    Regarding #2: I find it amusing when analysts talk about XOM and oil in the same breath. XOM has become an increasingly gassy company over the past ten years. Sure, NGL's and LNG are priced to oil, but not at parity, more often at a discount. If one wants to ride oil leverage through a large oil company (still somewhat questionable as large companies essentially have little growth) better to go to oilier CVX or OXY. XOM upstream earnings are at least 45% gas and getting gassier.

    Upside to oil is better traded with HES; APC; Tullow (if you can invest in pounds); smaller companies that can actually grow reserves and production due to strong exploration programs. But make sure you're right on the oil price direction.

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