What Held Back Exxon Last Quarter?

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Exxon Mobil (NYSE:XOM) may be the world’s largest company by market value, but the oil and gas producer has not turned new discoveries into productive fields quickly enough to replace shrinking output from assets that have been putting out oil and gas for decades, nor has it been able to outperform its biggest U.S. rival, Chevron (NYSE:CVX).

However, the company’s widening chemical margins made up for lower crude production and prices, and it reported Thursday that net income rose for the first quarter. Profit increased to $9.5 billion, or $2.12 per share, from the $9.45 billion, or $2.00 per share, reported a year earlier. Based on the average analysts’ estimates compiled by Bloomberg, Exxon was expected to report pre-share net income of $2.05.

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While crude production may be down at Exxon, it is by no means out. Exxon, under the leadership of Chairman and Chief Executive Officer Rex Tillerson, has been acquiring gas and oil fields in North America and expanding exploration in Russia, Africa, and the Gulf of Mexico in efforts to stem production declines. Still, lower output is expected to continue through the end of the year; after falling 5.9 percent in 2012, the company said in a March 6 presentation to analysts that production will drop another 1 percent this year…

The company’s production problems are evident in its Kearl oil-sands development in Canada; the field is expected to produce 3.3 billion barrels of crude over the next three decades, but the project has been beset by numerous problems, including equipment-transport delays. On April 23, company spokesman Pius Rolheiser said that Kearl was expected to produce its first load of pipeline-ready crude “within days,” according to Bloomberg.

Due to these difficulties with production and declining or stagnating demand for crude in some of the world’s largest economies, Exxon has underperformed Chevron and the broader market during the first three months of the year, advancing just 4.1 percent compared to Chevron’s 9.9 percent increase and the 10 percent gain of the Standard & Poor’s 500 Index.

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Crude demand slumped during the first quarter in Europe’s largest economies, Japan, and South Korea, the International Energy Agency said in a March 13 report seen by the publication. Mirroring this reality, Brent crude futures — the benchmark for two-thirds of the world’s oil — averaged $112.61 per barrel during that period, a decrease of 4.9 percent from $118.45 a year earlier…

This problem is especially concerning as Exxon depends on oil and gas sales outside the United States for 71 percent of its operating earnings, much more than an other major U.S. oil producer aside from Marathon Oil (NYSE:MRO), wrote Barclays analyst Paul Cheng in a research note seen by Bloomberg.

But the effect of lower crude prices were slightly mitigated by higher gas prices in the U.S., where the company is the largest producer of the fuel. Gas futures traded on the New York Mercantile Exchange averaged $3.48 per million British thermal units during the first quarter, an increase of 39 percent from a year ago, according to data compiled by Bloomberg. After the company purchased XTO Energy for $34.9 billion in 2010, Exxon became the largest U.S. gas supplier. Yet, even in that area, Exxon has problems; the company told analysts last month that its worldwide gas production will decline by 5 percent this year.

Shares of Exxon were trading down by as much as 0.79 percent, at $88.72, on Thursday morning.

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