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Exxon's Earnings Highlight Worrying Trend Among Oil Majors

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ExxonMobil (NYSE: XOM  ) , the world's largest publicly traded oil company, reported first-quarter earnings on Thursday. Net income came in at $9.5 billion, or $2.12 per share, up slightly from $9.45 billion, or $2 per share, in the year-ago period.  

Lower crude oil prices, which averaged $112.60 per barrel in the first quarter, about 5% lower than the same period last year, contributed to the company's flat profits. Exxon's chemicals and refining businesses had strong showings, however.

Relatively low natural gas prices in the U.S. drove profitability at its chemicals business, which reported a whopping 62% increase in profits compared with the same quarter a year ago. Similarly, profits at Exxon's U.S. refineries surged 72% from the year-earlier period to $1.04 billion, thanks to relatively cheap crude oil and natural gas feedstocks.  

Production declines a source of concern
But the more important revelation from the company's earnings report was the marked decline in oil and gas production, as well as the disparity between production and capital expenditures. Total oil and natural gas production fell by 3.5% from the year-ago quarter to 4.395 million barrels of oil equivalent per day, while Exxon's exploration and production unit's profit declined 10% to $7 billion.

Production declines come amid record capital spending, suggesting that more and more investment is needed to maintain current production levels. Last month, Exxon said it will raise capital spending to roughly $190 billion over the next five years, a level that's unprecedented even for the world's largest public oil company. Yet the company expects production declines to continue through the end of the year.

Through its unparalleled financial resources, Exxon has attempted to boost reserves and production by purchasing assets in various unconventional oil plays. Recent examples include its $1.6 billion purchase of Bakken shale assets from Denbury Resources (NYSE: DNR  ) in September, which increased the company's Bakken acreage by 50%, and its involvement with the Kearl oil sands project in Canada via its Canadian affiliate Imperial Oil.  

But despite the company's best efforts, results have proved largely disappointing.

A major challenge for the oil and gas industry
Exxon isn't alone in this regard. In recent years, most of the world's oil majors have seen declining or flat production growth, despite spending more and more money on boosting reserves and production. The main reason behind these diminishing returns is that new acquisitions haven't led to strong enough production growth to offset declining output from maturing fields.

For instance, ConocoPhillips (NYSE: COP  ) , another massive U.S. oil company, saw production rise by just 1.2% in the first quarter. And for the full year 2013, Conoco's total production is expected to decline slightly to an average of between 1.485 million and 1.52 million barrels of oil equivalent per day, down from last year's average of 1.527 barrels of oil equivalent per day.

Similarly, French oil giant Total (NYSE: TOT  ) reported a 2% decline in production for the first quarter, which, along with falling crude prices, led to a 7% drop in its first-quarter profits compared with the same quarter a year ago.  

Going forward, I expect the trend of stagnant or declining production to continue for the foreseeable future. In my opinion, the reasons are structural: The marginal barrel of oil has become much more costly to extract, and the industry will continue to have to spend more and more money to yield additional oil output.

Though the supermajors are having difficulty boosting production, companies focused exclusively on exploration and production are having better luck. Chesapeake Energy, for instance, has reported nearly 40% year-over-year liquids percentage growth. As the company transitions away from natural gas production, will it manage to meet its oil production target and boost cash flow? Or will it languish under the weight of its heavy debt load? To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as a bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

Read/Post Comments (1) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2013, at 4:21 AM, amvet wrote:

    The pattern of more exploration and development spending together with flat or decreased production is not new. The whopee about a world awash in cheap oil has no solid basis.

    Problems: (1) Many new fields being developed are small and production declines quickly. (2) Much new production is of heavy oil which flows slower. (3) Often new oil and NG finds are in remote and/or difficult locations that require infrastruction before production can start. (4) Shale oil production has a very high decline rate.

    A look at North Dakota´s situation is worth while. 8,501 producing wells. 5,312 of these in the Bakken Field. Average production per well per day in the Bakken 135 bbls. Out of the Bakken, 20 bbls.

    Do some arithmetic to see how many wells are needed to raise production by 500,000 bpd assuming a zero decline rate.

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