Downstream Earnings Boost Exxon

Exxon Mobil XOM topped expectations for the fourth quarter largely because of stronger-than-expected downstream earnings. Total adjusted earnings increased 72% to $6.4 billion from $3.7 billion last year. Upstream earnings increased to $3.7 billion from $2.5 billion last year on higher oil and gas prices. Production finally grew, albeit slightly, with volumes increasing less than 1% as new growth from the Permian and the Hebron project offset portfolio effects and natural gas decline. Importantly, excluding entitlements and divestments, liquids volumes grew 7% during the quarter and 3% for the year despite total production falling nearly 4%. The growth in liquids volumes demonstrates the shift to higher-value production, which should continue to play out in the coming years and result in margin expansion. Permian growth remained strong, with volumes increasing 90% year over year.

The downstream segment posted strong results as well, with earnings increasing to $2.7 billion from $952 million last year due to asset sales gains but also higher margins from the capture of North American crude differentials and an improved yield/sales mix. Chemical earnings remained an area of weakness, falling to $744 million from $935 million last year on lower margins and maintenance activity. Our fair value estimate and narrow moat rating are unchanged.

The ability to offset weak price differentials in upstream assets in Canada and the Permian through physical integration with downstream assets is a key element of differentiation for Exxon. To this point, Exxon announced this week a reorganization whereby it is streamlining its upstream business and centralizing project delivery, which will simplify the organization and increase integration with the downstream and chemical segments.

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