Could ExxonMobil investors get frozen out of oil recovery? (Image Source: ExxonMobil corporate website)

Compared with its oil and gas peers, ExxonMobil (NYSE: XOM) has managed the current crisis quite well. Since oil fell over 70% from its highs in 2014, shares of big, multinational, integrated energy companies such as Chevron (NYSE: CVX), BP (NYSE: BP), and Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B) have all fallen by 36% to 46%. Shares of ExxonMobil, meanwhile, have declined by only 22%, faring significantly better than nearly every competitor.

This outperformance may not continue much longer, though.

Why is Exxon outperforming?
Strong underlying fundamentals are the largest factor driving Exxon's outperformance. In 2015, earnings for the company dropped 50% from a year earlier to $3.85 a share. While this doesn't seem overly impressive, the rest of the industry fared much worse. Chevron saw its earnings decline 76%, BP's declined 87%, and Royal Dutch Shell actually swung to a loss.

While all of these companies have diversified revenue streams, Exxon's has proved most resilient. Integrated oil companies typically split their revenues between upstream (production) and downstream (refining and marketing). Drilling for oil, the upstream portion of sales, has been hit the most from declining selling prices. Exxon's U.S. upstream earnings declined $6.3 billion from 2014 to a loss of $1.1 billion in 2015. Upstream earnings outside the U.S. were $8.2 billion, down $14.2 billion. Fortunately, the company's downstream segment has picked up some of the slack. 

Refining profits typically benefit from lower oil prices. Exxon's downstream segment has used lower oil prices to widen their cut of the pump price of oil. So while consumers have seen their gas bills plummet, refineries have taken some of the savings for themselves. That's why Exxon's downstream earnings nearly doubled in 2015 to $6.5 billion, even while the upstream segment faced massive headwinds. The company's Chemicals segment has also benefited from lower input prices. Chemical earnings increased $103 million last year to $4.4 billion. So while most oil companies are struggling to cope with lower selling prices, 60% of Exxon's 2015 earnings actually came from segments that benefited from lower crude prices. 

How can this be a bad thing?
Exxon's approach has resulted in significantly less earnings volatility compared with its peers. As a result, the company was able to generate free cash flow of $6.5 billion last year, even after spending $26.2 billion in capital expenditures. But while its diversified business helped it weather lower oil prices, it may hinder Exxon's upside in an oil recovery.  

Because refining profits typically rise during periods of falling oil prices, Exxon has seen its downstream profits go from roughly 10% of operating earnings in 2014 to almost 37% in 2015. If oil prices stage a rebound, this newfound source of profits will be the first to shrink. While Exxon would surely benefit greatly overall of from higher energy prices, it wouldn't have nearly the earnings upside as more pure-play competitors. 

Exxon's inability to participate in oil rallies is easily demonstrated the last time oil prices staged a meaningful rebound. From 2009 to 2011, oil prices rocketed from $30 a barrel (close to where we are today) to nearly $100. Chevron and Royal Dutch Shell both saw their shares jump by around 25%. Even with its disastrous Deepwater Horizon oil spill, BP shares still ended that period about flat. Exxon shares meanwhile were actually down around 7%. Not only did its diversified revenue stream limit earnings upside, but investors typically flee to the company during times of turmoil, pushing up its valuation premium. Today, shares trade at 19 times expected 2017 earnings, slightly above Chevron's valuation and nearly double that of BP and Royal Dutch Shell.

While Exxon has proved to be a great defensive play when oil prices fall, it doesn't look like the best option for investors expecting a rebound in energy prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.