Higher Crude Prices Offset Exxon Mobil's Production Drop

(Exxon Mobil earnings story updated for conference call details on Rosneft strategy in Russia and North America)
NEW YORK (TheStreet) -- Exxon Mobil (XOM) reported third-quarter earnings Thursday of $2.13 a share, above consensus analysts' estimates of $2.12, and a quarterly profit that rivaled the gross domestic product of Malta and surpassed GDP of the The Bahamas. Think investors and traders care?

For those in-the-know in the energy markets, the headline numbers from the Big Oil quarterly reports are a non-event, but with crude oil prices much higher than last year, the "Big Oil profit soars" headlines will persist. The better headline for the reaction to the Exxon Mobil earnings was the fact that it was one of the market's biggest laggards -- barely in the green -- on a day of market euphoria as a result of the Eurozone debt plan, and as crude oil surged by close to 4%.

The Exxon Mobil results were one more example of the non-trading event known as Big Oil earnings. It played out exactly according to script, with the headline number looking good but production lower even as crude oil pricing lifted results.

Exxon Mobil reported third-quarter earnings of $10.3 billion, up 41% from the third quarter of 2010, which the company said reflected higher crude oil and natural gas realizations and improved refining margins.

Yet oil-equivalent production decreased 4% compared to the third quarter of 2010. Exxon Mobil said that excluding the impacts of entitlement volumes, OPEC quota effects and divestments, production was in line with 2010.

Royal Dutch Shell ( RDS.A) reported on Thursday morning that third-quarter profit doubled on higher oil prices. Europe's largest oil company earned $6.98 billion in the quarter, up from $3.46 billion a year earlier. Shell's production, though, fell in the quarter by 1.6% to 3.01 million barrels of oil per day.

On Tuesday, ConocoPhillips ( COP) reported lower net income in the third quarter versus a year ago, though excluding special items its profit was up, as higher crude oil prices -- though declining from the second quarter 2011 -- and better refining margins continue to offset production shortfalls for the oil majors.

Yet Conoco's production fell also from 1.64 BOE (barrel of oil equivalent) to 1.54 BOE quarter over quarter.

Higher crude prices and better refining margins with crack spreads at historic highs isn't a recipe to get investors too excited about the earnings headlines from the oil majors. The long-term view of production growth is a needle-mover while earnings tend to be glanced over quickly by investors who know that high crude profit means favorable comparisons to the previous year, but aren't a major reason to bid up shares. In the second quarter, most of the oil majors beat due to higher crude oil prices, but production shortfalls stood out against the headline numbers and kept shares from moving higher.

One of the more interesting issue for investors is Exxon Mobil's joint venture with Rosneft to develop Arctic and Black Sea resources, expand technology sharing and execute joint international projects, a deal it stole from BP ( BP).

The images of Exxon Mobil CEO Rex Tillerson hugging Russia's deputy prime minister, Igor Sechin, who is also the chairman of Rosneft, a year ago at the Davos economic forum were an early "tell" on its new chummy relationship with Putin's regime, and Tillerson provides a boilerplate quote or two for the earnings press release. However, unlike other Big Oil peers, Tillerson doesn't bother to get on the horn with analysts and investors to discuss results, with the head of investor relations at Exxon Mobil "where the buck stops" when it comes to answering earnings day conference call questions. As Raymond James analyst Stacy Hudson remarked ahead of Exxon Mobil earnings, getting anything of value out of Exxon Mobil in the earnings dialogue is typically a challenge.

"I never hold my breath in hearing details from Exxon," Hudson said, who was hoping to hear about Rosneft's ability to operate through Exxon Mobil in North America.

The typically tight-lipped oil giant didn't offer too much color on Rosneft. During the conference call, IR head David Rosenthal offered these data points on the Rosneft relationship:
  • Seismic underway in the Black Sea.
  • Seismic for the Kara Sea beginning in 2012.
  • Drilling potentially in 2014 in the Black Sea and around 2015 in the Kara Sea.
  • As far as Rosneft's interest in Exxon's U.S. assets, the example provided was that Rosneft would be given the opportunity to farm in to some of Exxon's 100% owned Gulf of Mexico blocks. Rosenthal also indicated that Rosneft was interested in unconventional resources, which is no surprise, given that the shale boom in the U.S. is migrating to international markets, and Russia's vast natural resources make the pursuit of shale a natural across its 9-time zone land mass.

    The big ticket item for COP, and ostensibly the major catalyst for shares -- by allowing it to focus E&P on getting better production growth -- is its plans to spin off its refining and chemicals arm as a separate company. ConocoPhillips said in an earnings release it expects to file an initial Internal Revenue Service ruling request this month and a Securities and Exchange Commission Form 10 in mid-November. The distribution of the downstream company shares is expected to occur in the second quarter of 2012. So the plan is on track, but we don't know more than that.

    BP ( BP) saw a bit of a run on Tuesday when it reported because it announced another $15 billion in planned asset sales, above its existing $30 billion divestiture plan, and plans to hike its dividend in 2012, with shares up 4%.

    Chevron ( CVX) reports on Friday morning. Chevron already previewed its earnings in an interim report issued earlier this month. Chevron said it expected results to be flat versus the second quarter 2011 due to the dip in commodity pricing quarter over quarter and lower production sequentially, but added results would be buttressed by a one-time refinery sale.

    Chevron announced after the market close on Wednesday that it was hiking its dividend by 4% to 81 cents.

    -- Written by Eric Rosenbaum from New York.

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