Margins Mask Exxon's Production Woes

Exxon Mobil (XOM - commentary - Cramer's Take) misses quarterly numbers.

Now, that shouldn't be a big surprise to anyone, especially given the rapid deceleration in refining margins, a big determinant in major integrated earnings. In fact, some would argue the numbers could have been worse than the reported $1.70 per share.

Yet, the real story has nothing to do with refining margins but with Exxon's -- and the other majors' -- inability to advance the ball when it comes to production. On an oil-equivalent basis, Exxon's oil and gas production dropped about 2% in the quarter. Now, that doesn't seem like such a big deal. After all, 2% should be pretty easy to get back.

Wrong. Production at ExxonMobil declined because the company's opportunity set for drilling new oil and gas wells is challenged, possibly severely challenged. And it isn't likely to get any better.

With oil at $90 a barrel, every oil and gas company is looking at every prospect they have for ways to increase oil and gas production. As a result, production should be moving higher. Yet, nearly every major oil company is producing fewer -- not more -- hydrocarbons than they were a year ago.

Naturally, skeptics will argue it's a vast oil company conspiracy: intentionally reduce production so prices move higher and then produce more oil, capturing bigger profits. Although that argument makes little sense at any price, it makes absolutely no sense with a barrel of crude oil approaching the century mark.

The last thing Exxon and other majors want is to post lower profits in the wake of near-$100 oil. After all, it's hard to believe an oil company isn't a proverbial currency printing press at these prices. Yet, earnings are lower this quarter when compared with last year and a quarter ago.

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At time of publication, Edmonds had no positions in stocks mentioned, although holdings can change at any time.

Christopher Edmonds is managing principal at Energy Research & Capital Partners, an energy investment firm and an affiliate of FIG Partners. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.