Exxon Mobil Corporation Earnings: Falling Sales Could Disappoint Shareholders

ExxonMobil (XOM 0.23%) will release its quarterly report on Thursday, and as much as U.S. drivers have appreciated falling gasoline prices over the past several months, investors in the oil giant are bracing themselves for the likely negative impact on ExxonMobil earnings from those trends. Even as rival Chevron (CVX 1.04%) has warned of poor production results in its December quarter, ExxonMobil should still have some advantages over BP (BP 0.71%) and other foreign oil companies that don't have as much exposure to the domestic energy market.

It's hard to appreciate the sheer size of ExxonMobil, which has flirted with a well-known tech giant for the status of the U.S.'s most valuable company. Yet maintaining that size is a constant challenge for ExxonMobil, which has to search for new production opportunities at the same time that it tries to find innovative new ways to provide energy alternatives and tap into ultra-long-term trends that could eliminate its traditional fossil-fuel business within the next few generations. The question investors face is whether the company has the vision to make it through what could be a huge transition in energy in the years and decades to come. Let's take an early look at what's been happening with ExxonMobil over the past quarter and what we're likely to see in its report.

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Stats on ExxonMobil

Source: Yahoo! Finance

Which way will ExxonMobil earnings move this quarter?
Analysts have gotten less excited about ExxonMobil earnings in recent months, cutting their fourth-quarter estimates by $0.06 per share and reducing their full-year 2014 projections by roughly double that amount. The stock has nevertheless climbed higher, rising 9% since late October.

Exxon's third-quarter-earnings report showed the challenges that the energy giant has struggled to overcome recently. Net income dropped 18%, with revenue falling by 2.4% despite a better-than-expected performance in growing production for the quarter by 1.5%. Yet price declines weighed especially hard on the downstream refining segment, sending the division's earnings down 81% and overwhelming a 12% jump in upstream-segment earnings.

One big concern that investors have had for a long time about ExxonMobil is whether it's aggressive enough in finding and capitalizing on production prospects. The company is well-known for its discipline in selecting only those projects that meet its internal requirements, but that has led to Exxon being conspicuously absent in certain promising areas. For instance, Chevron, BP, and other producers have done a better job of tapping the Gulf of Mexico's deepwater plays. Moreover, Exxon hasn't had nearly as much exposure to domestic shale plays as you'd expect from its size and influence in the industry.

But Exxon got a huge vote of confidence from an unexpected corner this quarter, as Warren Buffett added the stock to his list of holdings by taking a $3.4 billion position in the oil giant. Given Exxon's extremely low earnings multiples compared to the rest of the stock market, the investment seems like a natural one for Buffett. Yet perhaps the more important factor is that the buy indicates Buffett's belief that Exxon has the growth potential to avoid becoming just a declining cash cow in an evolving industry.

Still, Exxon will continue to face challenges. The company's production mix isn't ideal, with just 53% of production representing oil and liquids compared to almost 67% at Chevron. Yet as U.S. natural-gas prices have started to rise recently, Exxon's gas exposure could turn out to be a net positive in the long run. In particular, Exxon has been part of plans to build a huge $45 billion natural-gas-export project in Alaska, involving a new natural-gas counterpart to the Alaska Pipeline to bring natural gas from the North Slope to the Kenai Peninsula and a $25 billion gas liquefaction plant. With the Alaska state government coming on board, the project could potentially move the needle even for a company of Exxon's size.

In the ExxonMobil earnings report, look at the breakdown between the energy giant's upstream and downstream results to get a sense of future trends in the industry. But also bear in mind that exploration and production will continue to play the key role in Exxon's growth going forward, so look for promising new projects that could drive growth in the long run.

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