ExxonMobil Corporation Earnings: Is Russia the Biggest Threat?

On Thursday, ExxonMobil (XOM -0.22%) will release its quarterly report, and investors aren't entirely sure what to make of the oil giant's prospects. Even though its shares have risen to new record highs, ExxonMobil faces not only the constant challenge of keeping its production levels but also geopolitical concerns about whether economic sanctions against Russia will lead to big problems for Exxon's business there. Moreover, as Chevron (CVX 0.26%), Royal Dutch Shell (RDS.A), and other global oil giants go around the world looking for the best prospective oilfields, Exxon faces increasing competition for prime assets that can do the most to help it replace production.

ExxonMobil and the oil industry in general is an interesting case study right now, as it still hasn't fully recovered from its boom times in the mid-2000s before the financial crisis. Oil hasn't approached the $150-per-barrel market ever since, and prices of crude in the U.S. have actually been depressed due to a lack of transportation infrastructure, regulations curtailing exports, and huge production increases from unconventional plays. 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.

Source: ExxonMobil.

Stats on ExxonMobil

Source: Yahoo! Finance.

How well will ExxonMobil earnings fare this quarter?
In recent months, analysts have cut back on their views on Exxon earnings, cutting first-quarter estimates by 6% and taking $0.30 per share off their full-year 2014 projections. The stock, though, has risen, gaining 6% since late January.

ExxonMobil didn't start off the quarter on the best of notes, with its fourth-quarter earnings report sending shares down about 5% over the following week. Exxon saw earnings drop 16%, with its downstream operations weighing especially hard on its overall results, as the segment's profitability got cut nearly in half. Revenue fell by more than 3%, defying expectations for a smaller sales decline as oil-equivalent production volumes dropped by 1.8%.

The most disturbing thing about ExxonMobil's production challenges is that the company has paid ever-increasing capital expenditures in efforts to find new opportunities to raise production. Exxon's capex has grown by a third since 2010, while Chevron's has nearly doubled. Yet both companies have seen drops in net oil-equivalent production figures, reflecting the fact that ExxonMobil has had to consider higher-cost, less profitable alternatives that wouldn't have been economically viable under the lower-price conditions that prevailed in the early 2000s.

Still, ExxonMobil has pulled out all the stops trying to restart its growth engines. The company has started looking for ways to produce oil from oil shale, which the U.S. has in abundance. Yet Royal Dutch Shell and Chevron have both given up their attempts to reap economically viable oil from shale, and it's far from a certainty that ExxonMobil will find a successful method to tap its plentiful shale reserves. If it turns out that even oil prices above $100 per barrel can't make production viable, it's hard to foresee oil shale becoming important anytime in the near future.

Now, geopolitical tension has become a sticking point for ExxonMobil. Exxon has partnered with Russia's Rosneft to explore and drill shale deposits in western Siberia, as well as conduct offshore drilling activities in the Arctic Ocean and the Black Sea. With billions invested, though, Exxon faces an uncomfortable result if economic sanctions make what could be a $500 billion opportunity evaporate under political pressure.

In the ExxonMobil earnings report, listen for signs of how the company is addressing its Russian exposure while also looking for ways to boost production. With prices at comfortable levels, the key for Exxon is to take maximum advantage of those prices as long as they last -- and as long as the Russian threat doesn't turn into anything more serious than it already is.

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