Tuesday, January 27, 2015

Low Oil Prices Will Catch Up With Exxon's Fourth-Quarter Results

This article was first published by TheStreet on January 26, 2015
By Sarfaraz A. Khan
NEW YORK (TheStreet) -- Exxon Mobil  (XOM - Get Report) , the largest U.S. oil and gas producer by market cap and output, dodged the oil price bullet when it reported 3% year-over-year earnings growth in its third-quarter results back in October. But the Irving, Texas-based company won't be so lucky next week when it reports its fourth-quarter results.

In the third quarter, Exxon reported better-than-expected results, despite a 4.7% year-over-year drop in production and lower oil prices. This was due to the strong performance from its refining business, where profits soared by 73% from the same quarter last year to over $1 billion. The refining business benefits from low oil prices since here, unlike the oil and gas production operation, oil is used as a raw material.
Exxon's refining unit could report another increase in profits for the fourth quarter, given that WTI oil prices have dropped from nearly $90 a barrel to less than $55 during the three months ending December. This compares against the price of more than $92 a barrel in the fourth quarter of 2013.
That said, Exxon is primarily an oil and gas producer that generates most of its income from the upstream business. In the first nine months of 2014, the company's earnings from oil and gas production were more than $22 billion, or approximately four times greater than its combined earnings from the refining and chemicals businesses.
It is also worth mentioning that a majority of the large-cap oil producers, such as Exxon,Chevron  (CVX)  and Apache (APA) , typically do not hedge their oil production. The profits and cash flows of these companies, therefore, have significantly greater exposure to a plunge in oil prices than some of their other peers, such as Devon Energy  (DVN) , that have hedged a majority of their output.
With significantly lower oil prices in the fourth quarter of 2014 compared to the same period in 2013 and no meaningful hedges in place, Exxon's profits in the fourth quarter could fall by 28.9% from a year earlier to $1.36 a share, as per estimates compiled by FactSet.
Exxon has been talking about increasing its margins from oil and gas exploration and production by focusing only on its higher-margin projects. With weaker oil prices, these cash margins could still expand but less so, according to a January report emailed to TheStreet from Credit Suisse's analysts led by Edward Westlake.
Additionally, Exxon will also provide details on its capital expenditure plan for 2015. The company, like its French peer Total  (TOT) , which recently slashed its 2015 capital expenditure by 10%, is also going to reduce its spending budget. However, in Exxon's case the cut was already anticipated because the company's capital spending peaked in 2013 at more than $40 billion but was forecast to fall to $39.8 billion in 2014 and less than $37 billion per year through 2017.
These estimates, however, were released by the company during a presentation in March 2014 -- seven months before WTI prices dropped to under $100 a barrel. Therefore, it wouldn't be surprising if Exxon cuts its 2015 budget by double-digit rates in light of the weak oil price environment. Lower capital expenditure will reduce Exxon's costs, but a significant reduction will also impact future production growth.
Alan Jaffers, Exxon's spokesman, declined to provide any comments ahead of the fourth-quarter earnings.