It's Smart to Be Concerned About ExxonMobil

Given this company's solid management, technological sophistication, and geographic diversity, I've long been an advocate of ExxonMobil (NYSE: XOM  ) , the world's biggest publicly traded energy company. That really hasn't changed, but with our geopolitical and energy worlds both in an upheaval, I'm carefully watching a few issues at the company.

You're likely familiar with the company's results for the fourth quarter of 2011. The king of Big Oil racked up earnings of $9.4 billion, or $1.97 a share, compared with $9.25 billion, or $1.85 a share, for the final quarter of 2010. To use relatively recent earnings season vernacular, this year's per-share results were either a "beat" by a penny or a "miss" by the same amount, depending on which analyst survey you glom onto.

A grand Exxon tour
Regarding the difference between the two, as an erstwhile analyst I'm compelled to repeat my usual caveat that a miss or a beat by even several pennies is meaningless when one's target is a company with the complexity of Exxon. Indeed, given the spread of the company's operations, a Wall Street prognosticator would need to travel to Russia's Sakhalin island, and on to Brazil, Iraq, the U.S. Gulf of Mexico, Canada, Sub-Saharan Africa, and numerous other garden spots -- along with visiting several refineries -- in order to obtain anywhere near the detail required to be able to accurately forecast the company's results.

Now, having dispensed with what I hope won't be construed as analyst bashing, let's move on to a few of the items that I believe bear watching at the company:

Production
David Rosenthal, Exxon's vice president of investor relations, told analysts and others on the company's post-release call that upstream earnings increased by $2 billion, as crude oil realizations increased year-over-year by $22 a barrel and gas prices were up by $1.09 per thousand cubic feet. But perhaps of more importance, oil equivalent volumes were down 9% despite a "ramp-up of projects in Angola and Iraq and continued strong performance in our U.S. unconventional resource business." Without the effects of lower entitlement volumes, quotas, and divestitures, production declined by 4%.

The key here is the production slide. While one quarter does not a trend make, I'd like to see ExxonMobil's volumes expand by more than the 1% that the company eked out for an entire year, or something higher than its 4% increase without entitlement volumes, quotas, and divestments.

Natural gas
Chesapeake Energy
(NYSE: CHK  ) , the second-largest U.S. producer of natural gas, and ConocoPhillips (NYSE: COP  ) , the third-biggest major integrated company -- which is soon to be "disintegrated" through the divestment of its downstream operation -- have both recently announced that they'll curtail their natural gas operations in the face of continuously plummeting prices for the fuel. However, the nation's largest natural gas producer, Exxon, won't follow suit, so it won't participate in shrinking the glut of gas in the U.S.

As Rosenthal said, "We remain bullish on the demand side of natural gas as an energy source in the U.S." I couldn't agree more, nor apparently could President Obama -- as was indicated in his recent State of the Union speech. The immediate difficulty with that sentiment, however, is that we're a long way from having the infrastructure available to do justice to gas from a demand perspective. So I'm surprised the powers-that-be at Exxon haven't decided to reduce its North American gas operations.

Share purchases/dividends
The discussion concerning whether it's more beneficial for companies to repurchase their shares (especially when management believes they're undervalued) or to parcel "excess" funds to shareholders in the form of dividends is as old as dirt. Nevertheless, ExxonMobil's regularly coughing up in the vicinity of $5 billion a quarter for repurchases, while lagging behind its peers in the dividend yield department, is somewhat curious. Despite my belief that crude prices are headed higher this year -- especially when the boycott of Iranian crude takes hold -- I believe it'd be beneficial for Exxon to move closer to the rest of Big Oil vis-a-vis dividend yields.

Company

Indicated Forward Annual Dividend Yield

BP (NYSE: BP  ) 3.80%
Chevron (NYSE: CVX  ) 3.10%
ConocoPhillips 3.75%
ExxonMobil 2.20%
Royal Dutch Shell 4.60%

Source: S&P Capital IQ.

Geography
As I've indicated to Fools on several occasions, I'm concerned about the stability and working conditions in Iraq, where Exxon and a number of its global peers -- along with a host of oil-field-services operatives -- are working diligently to raise the country's production levels. Unfortunately, immediately following the departure of U.S. forces from the country, internecine battles between Shiite and Suni Muslim forces erupted with a vengeance.

Further, a year ago ExxonMobil signed a pact with Russia's giant state-run oil company, Rosneft, whereby the two companies will jointly conduct exploratory efforts in the Russian Arctic and the Black Sea. At the same time, Exxon will involve Rosneft in its Gulf of Mexico operations, as well as in Canada. Given the recent increase in tension between Russia and the U.S. -- along with the former country's habit of figuratively breaking kneecaps of western companies that end up in its jurisdiction -- I'm far more keen on the geographic concentration of Chevron, which is active upstream in Saudi Arabia (rather than Iraq) and last year pulled out of a venture with Rosneft.

A Foolish bottom line
None of this is written to indicate that ExxonMobil should be avoided by Foolish investors who have a taste for energy. The company is solid, but it does have issues that deserve attention. Indeed, given the rapid changes occurring in energy worldwide, I strongly recommend careful attention to all of the companies listed above, ideally by adding each to your free version of My Watchlist.

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Motley Fool newsletter services have recommended buying shares of Chevron and Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies listed this article. The Motley Fool has a disclosure policy.


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