3 Big Issues to Watch at ExxonMobil

There are two very different ways to consider the current ExxonMobil (NYSE: XOM  ) , by far the major domo of the big oil contingent.

The first involves carefully examining the company's third-quarter results and its near-term prospects. The second is to look farther afield at how the company may become altered in more fundamental ways. Only by combining both approaches is it possible to determine the extent to which the huge company may represent a compelling investment opportunity for those with a propensity for energy equities.

How'd it do?
Let's first take a gander at the results for the September quarter, as reported by Exxon on Thursday. For the period, the company earned $9.57 billion, or $2.09 per share, compared with $10.33 billion, or $2.13 per share for the comparable quarter a year ago. (The smaller year-on-year per-share differential obviously results from the company's spending about $5 billion per quarter on buybacks.) The analysts who follow ExxonMobil had arrived at a consensus expectation of $1.95 per share.

Revenue for the big company was down 8% to $115.71 billion, an amount that nevertheless handily topped expectations of $112.40 billion. As an erstwhile analyst, I've noted frequently that the geographic spread and overall complexity of Exxon renders analysts' forecasts for the company merely a stab, rather than a meaningful estimate.

Upstream, the company earned $5.97 billion for the quarter, down $2.42 billion from the third quarter of 2011. There were a host of factors involved in the decline, including reduced oil and natural gas production, about $1 billion in asset sales a year ago, lower prices received for both liquids and natural gas, unfavorable tax items, and foreign exchange effects.

Conversely, the company benefited from downstream earnings, which increased by $1.61 billion to $3.19 billion in the most recent quarter. In addition to higher refining margins, the improvement resulted from reduced operating expenses, asset sales, and foreign exchange effects. ExxonMobil's chemical earnings of $790 million represented a $213 million year-on-year decrease.

A trio of concerns
There's always a bevy of new developments occurring at a company the size of ExxonMobil. Currently, these would include its role as the biggest U.S. natural gas producer, its activities in the Gulf of Mexico, and the start-up of new production offshore Angola. But from a more macro and futuristic perspective, there are three items I'm currently watching closely in connection with the company:

  • First, as I noted above, the company's output of both oil and natural gas declined during the third quarter. It's meaningful to note, however, that the period's reduced production was hardly a one-off occurrence. In at least the past several quarters, Exxon's production has declined, as some of its existing fields became tired, and major new finds became progressively more difficult to come by. As a result, as I've mentioned to Fools previously, there's a growing school of thought that ExxonMobil, which in 2010 expanded its U.S. natural gas reserves dramatically when its spent $35 billion to purchase Fort Worth-based XTO Energy, may have developed an appetite for another major shopping spree. Companies receiving attention as possible targets for an Exxon purchase include Anadarko Petroleum (NYSE: APC  ) , Apache Corp. (NYSE: APA  ) , and EOG Resources (NYSE: EOG  ) . Each of the Houston-area companies boasts market capitalizations slightly in excess of $30 billion, and each would add meaningful assets to Exxon, as its management attempts to halt its production declines.
  • The second major item I'm keeping tabs on at Exxon involves the possibility of the company packing up and leaving Iraq, where it has been working with Royal Dutch Shell (NYSE: RDS-B  ) to revitalize the country's big West Qurna-1 field. Should Exxon quit the project, it would probably be to sign a more lucrative deal with the Kurds in the northern part of the country. It might also be joined by others currently laboring under the less-than-generous deals they signed with the government of Iraq. A resulting danger, of course, would be the vacuum that would result in the all-important energy sector of a country whose government is already struggling.
  • Finally, I may be somewhat jaundiced, but I must admit to being less than enthusiastic about the long-term future of ExxonMobil's deal with Russia's Rosneft to develop that country's apparently vast Arctic reserves. The pact also introduces the state-controlled company to participation in Exxon-operated projects in the U.S. and Canada. As you might suspect, my concerns about the partnership result from having watched western companies -- especially Shell and BP (NYSE: BP  ) -- being cuffed around in their dealings with Russians and the Putin government. Indeed, even ExxonMobil has experienced its share of trials during its tenure on the Sakhalin-1 project, on the frigid and desolate island of the same name to the east of the Russian mainland.

A Foolish takeaway
In many respects, these three major considerations render ExxonMobil something of a microcosm of today's international energy scene. On that basis, I intend to monitor the company closely. My intention involves both keeping abreast of ExxonMobil as a specific investment opportunity and watching it as a precursor of wider trends in the industry. I suggest that Fools with a bent for energy -- and that, in today's world, should include all investors -- add the company to My Watchlist.

If you're on the lookout for some other currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.

David Lee Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache and ExxonMobil. 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. The Motley Fool has a disclosure policy.


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