There was never a real concern that ExxonMobil (NYSE:XOM) would crumble under the weight of the most recent collapse in the oil and gas market. Its rock-solid balance sheet and conservative management were built to handle these sorts of downturns. What is of greater concern is the company's oil and gas production, which since the beginning of 2016 has declined more than 9%.
While ExxonMobil's second-quarter earnings didn't assuage any of these production concerns, management did seem to acknowledge the issue by green-lighting some new capital projects. Here's a quick look at the company's most recent quarter and some of the new investments on the horizon.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$62.8 billion||$63.2 billion||$57.7 billion|
|Net income||$3.35 billion||$4.09 billion||$1.70 billion|
|Earnings per share||$0.79||$0.95||$0.41|
|Cash flow from operations||$6.9 billion||$8.2 billion||$4.6 billion|
No company the size of ExxonMobil can have everything go right all at once. In fact, the company's entire business model is built on the idea that some parts of the business will do well while others struggle. This past quarter, what did extraordinarily well was its downstream refining business. Higher throughput volumes and better margins helped drive great results for this part of the business.
Almost all of these gains came from its non-U.S. refining operations, which isn't surprising to hear. U.S.-based refiners have thus far reported so-so results because product inventories have been high in 2017. On the one hand, it wasn't until toward the end of the quarter that refined product inventories started to come down. Internationally, on the other hand, refining margins have been quite good. Integrated peer Total's (NYSE:TOT) most recent result showed that its downstream segment produced similar results to the prior year even though it had shut down a couple of refineries for significant turnaround and expansion work.
As was the case last quarter, ExxonMobil's U.S. upstream segment was a stain on the overall report. Part of that weak result was from lower price realizations -- $43.50 per barrel of oil -- so some declines should be expected. This is still something worth keeping tabs on because U.S. onshore development in the Permian Basin is supposed to be a core growth pillar in the coming years. Management has been playing it slow here thus far to understand the geology better and optimize its drilling operations. Pretty soon, though, it will go into growth mode.
What happened with ExxonMobil this quarter?
- As mentioned above, overall production rates dropped again to 3.92 million barrels of oil equivalent per day. Management did say that production was up 1% compared to the prior year if you don't count entitlement effects from equity affiliates and divestitures. That isn't too encouraging, though, because they do ultimately impact production.
- The company gave a final investment decision to advance its Liza discovery in French Guyana. Phase 1 of the project will be a 120,000-barrel-per-day floating production, storage, and offloading facility that should have a better than 10% return at $40-a-barrel oil. It hopes to have the project operational by 2020, which has to be one of the fastest approval and construction timelines for a deepwater project.
- On top of the approval of Liza, management also announced a recent discovery well in the same exploration block that contains more than 500 million barrels of oil equivalent. This particular exploration block has now added 2.3 billion-2.8 billion barrels of recoverable resources to Exxon's books in the past 12 months with only four discovery wells. The company expects to drill another three exploration wells in this block by the end of the year.
- ExxonMobil acquired a 1.4 million ton per year aromatic petrochemical manufacturing facility in Singapore for an undisclosed amount. The facility is less than three miles from Exxon's existing Singapore petrochemical complex.
- Exxon also announced it would start work on another major petrochemical plant with joint venture partner Saudi Basic Industries Corporation. This is one of 11 major chemical, refining, lubricant, and liquefied natural gas plants Exxon plans to build in the U.S. Gulf Coast.
- Exxon will spend $300 million over the next 10 years to build a retail presence in Mexico. Last year, the Mexican government opened up the country's petrochemical industry to foreign investment. With little competition in the country, it is likely going to be a gold rush for companies over the next few years.
What management had to say
ExxonMobil's production strategy is slowly shifting toward shorter cycle developments. The Liza discovery coming on stream in five years is a great example, and the Permian Basin is another. After making a $5 billion investment in the Permian at the beginning of the year, management continues to develop this area such that it is a powerhouse production source. Here's Executive Vice President Jeff Woodbury on Exxon's progress in the Permian:
Despite growing industry activity in the Permian, we have successfully offset inflationary pressure through increased efficiencies and high recoveries per well. And this includes, among other factors, a continuing reduction in drilling days and cost per foot as well as further improvement in completion designs. We currently have 16 operated rigs in the Delaware and Midland Basins combined and expect to reach 19 total rigs by the end of August...
We also continue to optimize our logistics and infrastructure plans, including export capacity, gas gathering, and water handling. For example, ExxonMobil recently executed an agreement for Summit Midstream Partners to develop, own, and operate a new associated gas gathering and processing system servicing the northern Delaware Basin. I'm pleased with our progress to date, and anticipate that as activity continues to ramp up, we will continue capturing efficiencies. Our estimated unit development costs for the full northern Delaware acreage is $5 to $7 per oil equivalent barrel.
What a Fool believes
Exxon's results do look much better than those in the prior year, but that particular quarter was possibly the worst one the oil and gas industry had faced in decades, so it was a rather low hurdle to clear. The more promising signs were that the company's cash flow from operations is at the point where it covers both investments and dividends to shareholders. This will either free up cash to invest in these new projects such as Liza or get back to buying back stock to juice shareholder returns over the long run.
Production growth has been a concern lately, but shifting production trends for a company this large will take a few quarters. Hopefully, its supercharged Permian production plan and other projects set to start up soon will help to reverse these declines in short order.