First-Quarter Results Weren't Great but Reflect Industry ChallengesFirst-quarter results topped the average estimates from analysts, and the company managed to grow earnings. On the other hand, bears point out it was the seventh consecutive quarter of year-over-year production declines. They also note that much of the earnings growth came from Exxon's chemical business, not from oil and gas, the primary revenue drivers. Indeed, total revenue declined 12% in the first quarter, to $108.8 billion from $124.1 billion a year earlier. And oil and gas production declined 4% year over year. There was a 2% sequential increase in oil and gas production, but that didn't help all that much.
Natural gas production was down 6% internationally. But Exxon was able to make up for this in crude oil production, which was better than expected even though it fell 1% year over year. It was also a surprise that Exxon's profits advanced by 0.5%, given that the company's "realization" for oil and gas (the price it receives for these commodities) declined 1% from a year earlier. Granted, these results weren't stellar. Understandably, investors were a bit peeved. But Exxon is not alone in its energy struggles.
I've written at length about Schlumberger ( SLB) and Halliburton ( HAL) and the challenges they face with weak oil prices and soft rig counts, which contributed to their poor sequential performances. Exxon was no exception. Besides, even though Exxon is the world's largest oil producer, replenishing oil and gas consumption, which again fell 6% worldwide, is no easy task. Understandably, there is now a bearish tenor regarding Exxon's performance. But to expect better results in this poor energy environment, you might as well ask for oil to turn into wine. Miracles aren't happening. Execution should be the focus. To that end, Exxon did as well as expected.
Will Growth Ever Return?Without question, the most essential topic in this sector today is whether growth is gone for good. Given the production struggles that exist, it will require significant investments to find untapped oil resources. Granted, companies like Exxon and Chevron aren't lacking in cash to fund exploration projects. But they do risk losing their capital investments if oil and gas prices fall further. Exxon, which already has high production relative to peers, is already suffering revenue declines due to weak prices of oil, which fell $8.66 per barrel from a year ago. Given the uncertainty that still remains regarding oil prices, will management risk throwing good money toward potentially bad projects only to further hurt profitability? Investors can't have it both ways. This is not a risk I think that is worth taking at this juncture. However, there are other options, such as M&A, which can ignite growth in short order.
Management has to find the right opportunity and mix. In the meantime, there are still plenty of opportunities for Exxon to turn things around -- it's just going to take a little bit longer than investors would like.