The Key Takeaways From ExxonMobil's Earnings

Integrated energy giant ExxonMobil (NYSE: XOM  ) is out with its fourth-quarter and full-year report, and the results are mixed. This shouldn't entirely come as a surprise, since ExxonMobil's integrated structure means certain business segments will perform well while others lag. In all, ExxonMobil's quarter and full-year looked pretty ugly on the surface. However, a deeper analysis reveals measurable progress considering the dour environment affecting some of ExxonMobil's major businesses.

ExxonMobil is the biggest energy company in the world, so naturally investors would assume it's a company with low volatility in its underlying business. That largely wasn't the case last year. Now that the results are in, here are the major takeaways for investors from ExxonMobil's earnings report.

The grand totals
ExxonMobil's diluted earnings per share fell 24% last year. The fourth quarter's results weren't quite as bad, since diluted EPS dropped a more modest 13%. Of ExxonMobil's two key operating segments, upstream and downstream, there was a clear culprit for the company's earnings decline: downstream operations. Exxon's best performing segment was chemicals, which held fairly steady. Profit from its chemicals business declined by 5% in the fourth quarter.

ExxonMobil's U.S. and international upstream segment, which contains exploration and production activities, posted earnings declines. Still, the upstream business performed fairly well in relation to downstream operations, which include refining. Exxon's U.S. and international downstream segments saw profitability decline by nearly half in the fourth quarter.

Refining continues to weigh, but notable progress was made
Over the first three quarters of 2013, ExxonMobil's refining unit served as a major anchor on overall profitability. That's because spreads between West Texas Intermediate crude oil in the United States and Brent crude, the international equivalent, contracted severely throughout the year. Unfortunately, this did not subside entirely in the fourth quarter.

Refining woes have negatively affected all of the integrated majors over the past year. Non-integrated major ConocoPhillips (NYSE: COP  ) is now an exclusively independent exploration and production company after spinning off its refining and midstream unit, Phillips 66 (NYSE: PSX  ) . This is what allowed ConocoPhillips to post better results than its integrated peers. ConocoPhillips' full-year 2013 adjusted earnings increased 6%. By comparison, Phillips 66's adjusted earnings per share collapsed by 30% in 2013.

According to ExxonMobil's earnings presentation, refining conditions remained weak, but did improve in the fourth quarter. The company notes that West Texas Intermediate prices declined, which widened the discount to Brent. In addition, overall volumes increased, which helped boost segment earnings. This caused some strengthening in global refining industry conditions, which was vital to the company's overall results.

Nevertheless, the results were still poor: All of ExxonMobil's businesses posted lower earnings in the fourth quarter, year over year.

Key questions for the upcoming year
Obviously, ExxonMobil's downstream business needs to recapture favorable margins for profitability to reverse course. Signs of progress on this front appeared in the fourth quarter, and it needs to continue for downstream growth to resume. On the upstream side, ExxonMobil points investors to a few major exploration and production projects, which it's hoping will boost earnings in the upcoming year.

Specifically, ExxonMobil recently announced its fifth major discovery in Tanzania, which will involve additional exploration drilling in 2014. Exxon is also currently drilling its second operated well at Vaca Muerta in Argentina, which the company believes is very high quality acreage.

The bottom line
ExxonMobil's struggles continued in the fourth quarter. In all, 2013 was a pretty bad year. At the same time, some progress is materializing. ExxonMobil's downstream segment remains a major laggard due to extremely poor refining conditions, but the environment saw some moderation in the fourth quarter. And, while Exxon's upstream segment also disappointed, the company has several promising exploration and discovery projects lined up for 2014. Those are what investors should focus on in the upcoming months.

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