XOM Gets Drilled on a Two-Bit Miss

For Dvorchak's preview heading into the Exxon Mobil conference call, please click here.

Exxon Mobil (XOM - commentary - Cramer's Take) missed expectations by a fairly large amount, 25 cents below an estimate of $2.52, sending the stock down over 3%. The reaction is not Akamai (AKAM - commentary - Cramer's Take)-like, however, due to Exxon's history of volatile results and the recent impounding of lower oil prices into the valuation.

The company missed last quarter as well, when it also should have been booming, but estimates turned right around and continued rising, so investors are of mixed sentiment as to what matters more:

• the EPS point realization today; or
• the three-month estimate trend before and after.

Conversely, close competitor ConocoPhillips (COP - commentary - Cramer's Take)can clearly guide more effectively!

Upstream realized substantially higher prices, but production was down 8%, more than originally expected by the analyst community. Management has guided to a "slight decline" in production in 2008, with a rebound in 2009, so investors could now expect a sharp reversal in production in the coming year.

Issues such as extended maintenance work, slower North Sea ramps and changing pricing entitlements all factored in, but mature field declines may be the biggest issue. Mature fields are declining at a 5% to 6% rate, which management points out is stable, not accelerating. The exploration and production necessary to replace declines requires ever more sophisticated technology, however, so management is not bulling up the ability to grow reserves. The company simply comments that this state of replacing mature fields is just a normal part of this business.

Exxon Mobil increased capex to 38% this quarter. Management noted that 12 projects were expected to ramp this year, and, so far, five are up and running, so additional production gains are back-end loaded this year.

Investors need to keep in mind that nearly 20% of production is connected to net interest-sharing arrangements, which can push around production volumes via contract term changes rather than physical production changes.

Downstream struggled more this quarter, with earnings down a couple billion, due to contracting margins. Refinery throughput is stable, but the crack spread is still the bogeyman for refining, whether inside the integrateds or with the pure plays like Valero (VLO - commentary - Cramer's Take).

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At the time of publication, Dvorchak was long Exxon Mobil, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.