Integrated energy giant ExxonMobil Corporation (NYSE:XOM) is set to report earnings on January 30. Its status as the largest energy company in the world means the entire industry takes its cues from what ExxonMobil has to say. The past year has been difficult for integrated energy majors such as ExxonMobil, which saw profits fall significantly through the first three fiscal quarters.
The market will clearly glean much about the state of the energy world when ExxonMobil provides its fourth-quarter and full-year results later this month. Here's what Fools should keep in mind when Exxon reports.
Downstream in the cross-hairs
Perhaps the most important item investors should pay attention to is the status of ExxonMobil's downstream segment. This is where refining activities are housed, which was the primary factor behind Exxon's collapsing profits throughout most of 2013. In all, Exxon's diluted earnings per share collapsed 27% through the first three quarters of the year.
The carnage rippling through the downstream corner of the energy market is reinforced by results from the refiners themselves. For example, HollyFrontier Corporation's (NYSE:HFC) third quarter net income sunk 86% due to extremely difficult underlying conditions. Its refining margins dropped by 65%, and there have been few company updates that indicate fourth-quarter conditions improved significantly.
ExxonMobil's downstream profitability shrank by a whopping 78% over the first nine months of the year. Upstream activities, which include traditional exploration and production, were fairly resilient over the first three quarters. This places a great deal of emphasis on whether refining turned around in the fourth quarter.
International results are especially troubling
It's also important to note the shocking disparity between Exxon's results in the United States and those from its international operations. While the combined upstream and downstream results from the United States have struggled somewhat over the course of the year, Exxon's international operations have absolutely collapsed.
ExxonMobil's U.S.-based upstream business is doing relatively well. Profits actually grew over the first nine months. Its domestic downstream business struggled, as profits there fell 14% in the same period. International operations, though, are really bringing down the energy giant.
Consider that international downstream profits fell from $8.5 billion through the first nine months of 2012 to just $931 million in the same period in 2013. This is due to falling refining spreads, which have crippled the segment. Investors should pay close attention to ExxonMobil's international business conditions when it reports fourth-quarter earnings.
Unfortunately, Exxon's upstream international operations haven't provided much in the way of shelter in 2013. Risky exploration and production activities have compelled other energy majors to closely scrutinize foreign geographies in recent months, and for good reason. A few, such as ConocoPhillips (NYSE:COP), have actually sold off assets in international areas deemed too risky. In November, Conoco completed the sale of its Algerian business for $1.75 billion. Through the third quarter of 2013, it divested a total of $12.4 billion worth of assets.
Conoco management stated its focus was on promising domestic plays that present a much more attractive risk profile. Perhaps ExxonMobil should adopt a similar strategy if its upstream international operations don't reverse course in the near future.
Are cash rewards enough to keep shareholders happy?
One thing investors can count on from ExxonMobil's fourth quarter will be billions in share repurchases and dividend payments. Even with ExxonMobil's underlying business complications, the company will still spend billions on share repurchases and billions more in dividends. Whether this is enough to keep its share price afloat should profits collapse again remains to be seen.
ExxonMobil's share price rose strongly as 2013 drew to a close, thanks largely to a huge investment from none other than Warren Buffett. Of course, ExxonMobil will need to prove that its business is back on track to keep that momentum going in 2014. Investors should keep refining and international operations squarely in focus when Exxon reports earnings on January 30.