Exxon Feels the Sting of Oil Price Volatility

Oil giant expands its basket of polyethylene products to offset lower upstream growth

E1Global oil and gas giant Exxon Mobil Corporation (NYSE: XOM) announced its Q2 FY16 financial results on July 29th, 2016. The Irving, Texas-based company is engaged in the exploration and production of crude oil and natural gas, manufacturing of petroleum products, and transportation and sale of crude oil, natural gas and petroleum products. The Company also manufactures and markets petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and various specialty products.

The Company operates through four segments: Upstream, Downstream, Chemical, and Corporate and Financing. The Upstream segment operates explores for and produces crude oil and natural gas. The Downstream segment manufactures and sells petroleum products. The Chemical segment manufactures and sells petrochemicals. The Company’s projects include the Kearl project, Heidelberg project, the Point Thomson project, the Hadrian South project, the Lucius project, Azeri-Chirag-Gunashli field, and the Barzan project, among others. Read more about Exxon Mobil’s financial results below.

Q2 FY16 financial highlights

E2During Q2 FY16, Exxon Mobil’s estimated earnings plummeted 59%, or $2.5 billion, to $1.7 billion, compared to $4.2 billion in the year-ago period. Diluted EPS was at $0.41, reflecting sharply lower commodity prices, weaker refining margins, and lower results from the Upstream and Downstream segments. These negatives were somewhat offset by the continued strength in its Chemical segment. Over the past few months, the Company has also been facing industry headwinds in the form of volatility of crude oil prices, a fall in natural gas prices, and a slight weakening of chemical product margins.

E3During Q2 FY16, Exxon Mobil’s capital and exploration expenditures fell 38% Y-o-Y to $5.2 billion. Oil-equivalent production was unchanged at 4 million oil-equivalent barrels per day, with liquids increasing 1.7% and natural gas declining 3.6% during the reporting quarter. Liquids production growth was mainly driven by recent start-ups, which more than offset the impact of field decline and downtime events, notably in Canada and Nigeria.

Cash flow from operations and asset sales was $5.5 billion, including proceeds associated with asset sales of $1 billion.

Segmental highlights

E4Upstream: During Q2 FY16, Exxon Mobil’s upstream earnings plunged to $294 million from $1.7 billion in the year-ago quarter. Lower liquids and gas realizations decreased earnings by $2.2 billion, while volume and mix effects increased earnings by $50 million. On the other hand, lower expenses, the absence of a one-time deferred income tax impact related to the tax rate increase in Alberta, Canada, and favorable foreign exchange improved earnings by $450 million during the quarter under review.

On an oil-equivalent basis, Q2 FY16 production of the upstream segment was essentially flat versus the year-ago quarter. Liquids production rose 39,000 barrels per day to 2.3 million barrels per day. Project ramp-up was partly offset by field decline and downtime mainly resulting from the Canadian wildfires. Natural gas production in Q2 FY16 plummeted 366 million cubic feet per day to 9.8 billion cubic feet per day, owing to field decline and divestment impacts.

The upstream segment’s U.S. earnings swung to a loss of $514 million in Q2 FY16 as compared to earnings of $467 million in the year-ago period. Non-U.S. Upstream earnings plummeted by $1.3 billion to $808 million versus the prior year period.

E5Downstream: During Q2 FY16, Exxon Mobil’s downstream earnings were down $681 million to $825 million versus the prior year period due to weaker refining margins, which decreased earnings by $850 million. On the other hand, favorable volume and mix effects increased earnings by $130 million. Lower maintenance expenses boosted earnings by $40 million, partly offset by unfavorable foreign exchange effects. Petroleum product sales of 5.5 million barrels per day were 237,000 barrels per day lower than the prior year due in part to asset management activity.

Earnings from the U.S. Downstream in Q2 FY16 remained flat at $412 million versus the year-ago period. Non-U.S. Downstream Q2 FY16 earnings of $413 million were $681 million lower than the year-ago quarter.

E6Chemical: During Q2 FY16, Exxon Mobil’s chemical earnings declined by $29 million to $1.2 billion in Q2 FY16 versus the year-ago period. Margins increased earnings by $150 million, and volume and mix effects boosted earnings by $70 million. The absence of asset management gains in the U.S. hurt earnings by $250 million, partly offset by lower expenses. In Q2 FY16, prime product sales of 6.3 million metric tons were 232,000 metric tons higher than the prior year quarter.

U.S. chemical earnings in Q2 FY16 were $509 million, a decline of $226 million from the year-ago period due to the absence of asset management gains. Non-U.S. chemical earnings grew by $197 million to $708 million in Q2 FY16.

Corporate and Financing: During Q2 FY16, Exxon Mobil’s expenses in the Corporate and Financing segment jumped to $636 million compared to $593 million in the year-ago period.

Acquisition of InterOil Corp.

Exxon Mobil announced on July 22nd, 2016, that it has agreed to purchase exploration and development company InterOil Corp. (NYSE: IOC) at $45 per share in a deal worth $2.5 billion. The oil major operates a project to develop and produce liquid natural gas in Papua New Guinea. The proposed acquisition would give Exxon Mobil access to InterOil’s resource base, including Elk-Antelope, one of the largest gas fields in Asia.

Other highlights

Exxon Mobil announced that drilling results from Liza-2, the second well in the Stabroek block offshore Guyana, confirmed a world-class discovery with a recoverable resource between 800 million and 1.4 billion oil-equivalent barrels.

Production at the Julia Oil Field in the Gulf of Mexico started ahead of schedule with project costs under budget. The initial development phase, with a gross design capacity of 34,000 barrels of oil per day, uses capital-efficient subsea tie-backs to existing infrastructure and is located 265 miles southwest of New Orleans in water depths of more than 7,000 feet.

The company started production at Point Thomson, the first company-operated project on Alaska’s North Slope. At full rate production, the facility is designed to produce up to 10,000 barrels of natural gas condensate per day and 200 million cubic feet of recycled gas. The recycled gas is re-injected for future recovery.

The expansion of the Taicang lubricants plant in China to double its capacity was completed in April 2016. The expansion includes the addition of automated blending technology and a new state-of-the-art quality assurance laboratory. This expansion improves the Company’s ability to supply premium lubricants to meet demand in China.

ExxonMobil is also expanding its polyethylene products with the introduction of Exceed XP performance polymers. Developed through advanced catalyst technology, process research, and applications expertise, Exceed XP is designed to provide extreme performance in a variety of film applications.

Share purchases

During H1 FY16, Exxon Mobil purchased nine million shares of its common stock for the treasury at a gross cost of $727 million. These shares were acquired to offset dilution in conjunction with the company’s benefit plans and programs. The Company will continue to acquire shares to offset dilution in conjunction with its benefit plans and programs, but does not currently plan on making purchases to reduce shares outstanding.

E7Dividends to shareholders

During Q2 FY16, Exxon Mobil distributed $3.1 billion in dividends to shareholders. Dividends per share of $0.75 increased 2.7% compared with the year-ago period.

Guidance for full year FY16

Based on the current forecast, refiners have witnessed shrinkage of their profit margins owing to higher crude oil prices. U.S. crude prices rebounded about 85% from the lows of January 2016 through the end of June 2016. Earlier in the oil price downturn, integrated oil companies’ refining operations offset the downturn in the production segments. Moreover, U.S. gasoline inventories are about 15% above the five-year average. As such, Exxon Mobil expects weak profit margins from refining crude oil into gasoline to persist at least through the spring of 2017.

Stock Performance

E8Exxon Mobil’s stock ended the day at $87.81, slipping 0.05%, at the close on Monday, August 15th, 2016, having vacillated between an intraday high of $88.50 and a low of $87.64 during the session. The stock’s trading volume was at 6,427,604 for the day. The Company’s market cap was at $366.87 billion as of Monday’s close.

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