The headlines were pretty scary for Exxon Mobil (NYSE: XOM), which just reported its second-quarter earnings. They read something like this: "Profits Plunge 66%"; "Dismal Conditions"; "Lowest Profit Since 2003".
If investors didn't know any better, they probably would have thought that Exxon Mobil was the next General Motors. Did anyone really expect Exxon Mobil to earn more than it did last year at this time, given that oil prices have been cut in half?
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Despite this $80 a barrel drop in year-over-year realized oil price for Exxon Mobil, the company earned an astounding $4.09 billion, or 84 cents per share in the quarter.
This is real profit. Not like Citigroup (NYSE: C), which reported a net profit of $3 billion a couple of weeks ago. A closer look at the earnings reveals that most of Citigroup's profit was due to its realized gain from the sale of part of its Smith Barney brokerage division to Morgan Stanley (NYSE: MS). Citigroup booked a $6.7 billion after-tax gain from the sale.
U.S. Downstream Segment Losses No Surprise
Exxon Mobil did lose money in its downstream segment, due mostly to its U.S. operations, but that was certainly no surprise to the market as every other integrated oil company or refiner had problems here.
Chevron (NYSE: CVX), the latest integrated oil company to report earnings, also lost money in its U.S. downstream operations. The company posted a $95 million loss here, offset by a $256 million profit in its international downstream.
Other criticisms leveled against Exxon Mobil are also based more on legend rather than fact. The company is accused of abandoning North America, and not moving quickly enough into the ubiquitous shale plays in the U.S. like its smaller independent exploration and production competitors.
Breakthrough In Horn River Basin Shale Play
The truth is that Exxon Mobil reported a breakthrough several weeks ago at a shale play in Canada called the Horn River Basin. The company has 250,000 acres under lease here and was a first mover. Initial reports from the company are that the Horn River Basin wells are the same size as those drilled by Chesapeake Energy (NYSE: CHK) in the Haynesville Shale. Chesapeake Energy just updated its production curve for the Haynesville Shale and sees initial production rates of 14.1 million cubic feet equivalent per day.
Exxon Mobil has even accumulated acreage in the Marcellus Shale, with 19,400 acres under lease. Although some may feel that the play is all leased up, it is much larger than any other domestic shale play, and leases expire continually as companies fail to drill on acreage that is not held by production.
Don't Cry For Exxon Mobil
The company reported an enormous profit in its Q2, albeit down sharply from the bubble-induced profits a year ago. It has a huge arsenal of properties in its portfolio and will be developing them at a cost-efficient pace over the next few years. (For a primer on the oil industry, refer to our Oil And Gas Industry Primer.)
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