IHS Global Insight Perspective | |
Significance | ExxonMobil's US$570-million fourth-quarter earnings drop failed to significantly impact on the U.S. supermajor's annual net income record of US$45.2 billion, which follows a year of record crude oil prices. |
Implications | ExxonMobil’s 11% rise in net income compared less favourably to Shell's 14% increase, although Exxon’s fourth-quarter earnings fell slightly more in percentage terms. Both supermajors were trumped by Chevron, however, which managed a fourth-quarter earnings increase on an asset swop, which offset falling crude prices and a quarterly decline in production. |
Outlook | The 33% fall in earnings is unlikely to affect ExxonMobil's capital expenditure plans going into 2009, given the cushion provided by massive annual profits and low operating costs which will ensure ExxonMobil can continue to generate profits, even with crude oil at the US$40/b mark. |
Annual Profit Smash
On Friday ExxonMobil Corp. (the United States’ largest petroleum company) posted its annual and fourth-quarter 2008 financial results. Profit earnings for the quarter were down US$570 million (or 33%) due to lower volumes and damage repairs associated with Hurricanes Gustav and Ike. Earnings (excluding special items) for the fourth-quarter stood at US$7,820 million (or US$1.55 a share), compared with US$11,660 million (or US$2.13 per share) in the previous quarter. However, the fourth-quarter profit drop did not have a significant impact on the supermajor's annual earnings (excluding special items) for 2008 which reached a dizzying US$44,060 million (US$8.47 a share), up 8% from US$40,610 million in 2007, largely on the back of a record rise in crude oil prices which hit a peak of US$147/b in July 2008. For the fourth quarter 2008, ExxonMobil's total revenue and other income declined to US$84,694 million compared with US$116,642 million a year ago. However, revenues bettered the expectations of Wall Street analysts who were predicting US$69,140 million, this was partially due to stronger downstream margins which increased to US$2.41 billion for the quarter, up from US$147 million year-on-year (y/y). This helped to offset hurricane damage, lower chemical volumes, and the fall in crude oil prices. Furthermore, the US$570 million profit drop did not come close to offsetting the massive US$14,830 million in profit posted for the third quarter of 2008 (see World: 31 October 2008: ExxonMobil Announces Record Net Profits for Q3). A diversified asset spread, integrated operations, and wads of cash helped protect the U.S. supermajor against the hefty 31.3% y/y fall in upstream earnings (to US$5,634 million for the quarter), largely a result of lower crude-oil realisations. ExxonMobil's 11% rise in net income compared less favourably with those of Anglo-Dutch supermajor Shell, which posted a 14% rise in profits for 2008 (see World: 29 January 2009: Shell Records Full-Year Results Up 14%, Capex Unchanged for 2009). However, U.S. rival Chevron managed what ExxonMobil and Shell could not, namely to post a fourth-quarter earnings increase as a gain from a clever asset swop offset falling crude prices and declines in production.
Figure 1: ExxonMobil: Earnings and Capital Expenditure
Q4 2008 | Q4 2007 | % Change | Annual 2008 | Annual 2007 | % Change | |
Earnings (excluding special items) US$ millions | US$7,820 | US$11,660 | -33% | US$44,060 | US$40,610 | 8% |
Earnings (per common share) | US$1.55 | US$2.13 | -27% | US$8.47 | US$7.28 | 16% |
Capital and Exploration Expenditure US$ millions | US$6,829 | US$6,151 | 11% | US$26,143 | US$20,853 | 25% |
Production Hiccup
ExxonMobil's figures also showed a slight hiccup on the production front. Production on an oil-equivalent basis was down by a marginal 3% from the same quarter of 2007, although two thirds of the output drop can be accounted for by OPEC quota cuts and lower entitlement volumes. Natural gas production available for sale for the quarter fell by 565 mmcf/d from 2007, partly from field decline and lower European demand offsetting rising production from projects in Malaysia, and the start-up of Qatargas II, Train 4, and the South Hook LNG terminal in the United Kingdom. Net production of crude and natural gas liquids also dipped by 1.7% y/y to 2,472 thousand b/d, mainly from falling year-on-year European and U.S. production. Despite the production and profit drop, ExxonMobil's shareholders were kept happy by the distribution of US$40.1 billion in 2008 and a 13% increase in per-share dividends versus 2007.
Figure 2: ExxonMobil Production Table
Q4 2008 | Q4 2007 | Annual 2008 | Annual 2007 | |
Net Crude and Natural Gas Liquids Production (thousand b/d) | 2,472 | 2,517 | 2,405 | 2,616 |
Natural Gas Production For Sale (mmcf/d) | 9,849 | 10,414 | 9,095 | 9,384 |
Oil Equivalent Production (thousand boe/d) | 4,113 | 4,253 | 3,921 | 4,180 |
Outlook and Implications
The 33% profit drop is unlikely to significantly impact on ExxonMobil's future expenditure plans in the short or medium term, given the company's massive capital reserves and the cushion provided by the record annual profit. Reductions in project expenditure are also unlikely given Rex Tillerson's recent speech at the Woodrow Wilson Centre in which he stated that the company is looking beyond "near term events" and thinking more "in terms of two, three or six decades consistent with the lifestyle of resource development projects". ExxonMobil's "Outlook for Energy" also suggests that ongoing growth in energy demand (mainly from China and India) will, despite present circumstances, be the dominant trend over the next few decades. In 2008 ExxonMobil spent US$26.143 billion, exceeding its US$20 billion/y capital expenditure plans up to 2011. In the past, massive capital reserves have allowed the company to practice countercyclical spending, taking advantage of the fall in prices and asset valuations to expand its global portfolio. However, given the emphasis placed on maintaining a disciplined investment programme, it is likely that ExxonMobil will stick to its US$20-billion capital expenditure plan over the coming year, while working to reduce costs and improve efficiency of its operations, for example through the development of new Q-Max LNG transport carriers that can transport 80% more cargo than conventional-sized ships, while requiring approximately 40% less energy per unit of cargo. ExxonMobil also plans to keep its share price stable by spending another US$7 billion to reduce outstanding shares during the first quarter of 2009.