Past oil investments and poor output drag Exxon earnings

Even oil giants like ExxonMobil aren’t spared from turning out less-than-favorable output reports. Compared with last year, its gas and crude oil production was lower by about 7.5% and, like other oil companies, Exxon had difficulty suppressing dwindling output.

Currently, it is producing about 3.96 Mn barrels per day of crude.  But despite the slowdown, the firm is still number 2 among publicly traded oil companies behind Rosneft.

The resulting EPS this year is $2.09 – a 4 cent decline from last year’s figure.  It managed to post net earnings close to $9.6 billion for the quarter ending September, but this was largely due to income from its oil refining activities, rather than from oil exploration and production activities, which was down by almost 30%.

The income drag may partly be traced to Exxon’s investment in XTO Energy two years ago.  While this helped increase Exxon’s natural gas reserves, the current market price is simply too low to boost company profits.

Recently, Exxon wasn’t as lucky enough to have struck big oil finds, prompting it to subdue wildcat drilling activities.

Of late, Exxon’s experienced managers seemed disinclined to recommend investing in oil drilling projects that are high-risk, fearing that what lies beneath may not be substantial at all.

Exxon had previously embarked on shale explorations in Poland. But after two unsuccessful drillings, the company decided to abandon the project.  Meanwhile, two oil giants (ConocoPhillips and Chevron) chose to stay and study the region’s geologic make up.

Apparently, Exxon is more risk-averse nowadays. It has opted to purchase shale deposits – one in North Dakota and another in Canada. It is thought by some analysts that there is very little drilling risk there as these assets are already proven to hold oil and gas in abundance.  Both shale assets cover about 850,000 acres.

Observers note that Exxon’s exit from Poland could be marred by political undertones.  If studies reveal that the country does have huge shale deposits, this could usher in some sort of balance in the European natural gas market which is almost dominated by Russian sellers.

Meanwhile, Exxon has teamed up with Rosneft and other partners via the multinational Sakhalin 1 Consortium.  It aims to find and produce oil and gas from Sakhalin Island, located in Russia.

Somehow, Exxon’s decision to invest in oil while teaming up with large government firms owned and operated by Russia could be one strategic move to downplay risks and, at the same time, achieve growth for the company.

Jointly, Rosneft and Exxon will soon explore the Russian Bazhenov shale – reportedly more massive than the Bakken shale of North Dakota.

This time around, maybe Exxon won’t make an early exit as it had in Poland.