ExxonMobil's (NYSE:XOM) $1 billion increase in net income from the year-ago quarter has to have shareholders seeing green. So why did the shares drop $1.51 on Friday? Isn't a 38% increase in earnings really good news for a stock selling at 14 times earnings?

Upstream earnings -- oil biz speak for exploration and production -- were 74% of total income. As impressive as $2.7 billion in profit is, it represents only a 9% increase.

Downstream earnings -- the chemicals, refining, and marketing end of the business -- saw earnings soar over 700% to $911 million. That is even more impressive when you realize that chemical earnings actually fell $123 million.

Indeed, prior to this year, total revenues had been in decline. The same is true for net income. Both should exceed 2000 levels for the first time this year. Capital spending, the company's investments for the future, will be up impressively this year.

To get a better feel for ExxonMobil, compare the last three years with the year-to-date (YTD) results -- all shown in billions of dollars.

    YTD    2002    2001    2000
    Revenue     $180.7  $204.5  $212.8  $231.8Net Income   $14.8   $11.5   $15.3   $17.7CapEx        $11.1   $11.5   $12.3   $11.2

A 5-year stock chart shows that ExxonMobil has outperformed many of its peers by over 10% -- and that does not include dividends.

So, why was ExxonMobil down on the news? Investors had to be concerned that oil and natural gas prices will fall -- and so will earnings.

Just as likely, ExxonMobil is a gigantic hidden gem. The company has more cash than debt -- a rarity in the capital-intensive oil and gas industry. It is investing in extremely promising places, and it has the cash to make those investments without adding debt. It also has cash to make acquisitions.

Exxon has been buying back its shares for years. This year will be the fourth that shares outstanding has decreased.

It is not even a foregone conclusion that oil and natural gas prices will decline very far. If OPEC is able to keep oil at their target price, the earnings downside at ExxonMobil will be limited. Political uncertainty in the Middle East, West Africa, and South America have caused oil prices to go higher -- and they could do so again.

Finally, let's not forget the 2.75% dividend -- anymore than we should we forget that the world runs on oil, and that ExxonMobil is the premier company in the oil patch.

W.D. Crotty can be reached at HawaiiFool@hawaii.com

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