Exxon Profits Jump, Share Price Doesn't (XOM, COP, RDS-A, RDS-B, CVX)

Oil and gas giant Exxon Mobil Corp. (NYSE:XOM) reported an earnings jump of55% this morning, solidly above expectations. For the company’s third quarter, diluted EPS came in at $1.44 compared with estimates of $1.39. Revenues didn’t keep pace, though, totaling $95.3 billion compared with estimates of $98.11 billion.

Another US oil supermajor, ConocoPhillips Corp. (NYSE:COP) also reported EPS of $2.05. Analysts had been expecting EPS of $1.46 on revenue of $45.6 billion. Royal Dutch Shell plc (NYSE:RDS-A, RDS-B) posted EPS of $0.56 on revenue of $90.71 billion. Chevron Corp. (NYSE:CVX) reports earnings tomorrow, and analysts are looking for EPS of $2.15 on revenue of $49.48 billion.

Exxon’s earnings jump resulted primarily from higher crude oil and natural gas prices. Oil-equivalent production rose 20% year-over-year. Cash flow from operations, excluding asset sales, totaled $13.1 billion.

The company also made money on its downstream operations. Refining margins were higher although marketing margins fell. The net effect was an earnings increase of $300 million year-over-year.

Natural gas prices have improved significantly since the beginning of 2010, now about $1/thousand cubic feet higher. That price boost was coupled with a natural gas production boost of just over 4 million cubic feet/day to 12.19 million cubic feet/day. Most of that increase resulted from Exxon’s acquisition of XTO Energy, which closed earlier this year.
The acquisition of XTO for about $41 billion has weighed on Exxon’s share price, especially because the price of natural gas is still only about $4.25/thousand cubic feet. With crude prices above $80/b, natural gas prices should be at least 3X higher. The problem is that shale gas is being produced in such quantity that prices are depressed.

It’s not clear that Exxon can satisfactorily explain its XTO acquisition to investors who think in terms of quarters and not decades. The long-run value of XTO’s assets is absolutely solid. As natural gas prices rise, even if they rise slowly, Exxon makes a fine profit on the deal. And, given the company’s free cash flow, it could buy back enough stock in the next couple of years to gobble up the 40 million or so shares it issued for the XTO acquisition.

Exxon’s share price has risen less than 1% today, about the same amount as Shell. Conoco shares have fallen about 1% and Chevron stock is slightly above flat.

Exxon has just said that it will buy back $5 billion in stock in the fourth quarter, a jump of $2 billion over third-quarter buybacks.
Paul Ausick