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What Factors Affected ExxonMobil’s Upstream Earnings in 2Q15?

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Upstream net income falls in 2Q15

ExxonMobil’s (XOM) upstream earnings witnessed significant decline in 2Q15. The segment recorded $2.03 billion in net income in 2Q15 compared to $7.88 billion in 2Q14.

In its US upstream operations, the decline was particularly severe, as the company recorded a $47 million net loss versus $1.19 billion in net income in the corresponding quarter last year. In the non-US operations, the company’s net income declined 69%.

Lower price realizations accounted for the majority of the decline in ExxonMobil’s upstream earnings in 2Q15 over the year-ago quarter. However, higher production volume helped protect the income dip in part.

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Crude oil price

In 2Q15, ExxonMobil’s average crude oil price realization in the US was 45% lower than in 2Q14. Natural gas price realization decreased 48% during the same period.

Crude oil and natural gas prices are the primary determinants of any upstream company’s business. In its upstream operations, ExxonMobil (XOM) explores, produces, and markets crude oil and natural gas. So, a fall in energy prices results in lower revenue.

Falling energy price can also dis-incentivize producers like Royal Dutch Shell (RDS.A), Suncor Energy (SU), and YPF (YPF) on exploration-related expenditure. ExxonMobil plans to cut capex by 11% to $34 billion in 2015 over 2014. ExxonMobil makes up 22% of the iShares US Energy ETF (IYE) and 23% of the Vanguard Energy ETF (VDE).

Strong upstream crude oil production

ExxonMobil’s (XOM) total crude oil and natural gas production increased in 2Q15 from 2Q14. On an oil-equivalent basis, total production increased 3.6% to 3,979 thousand barrels of oil equivalent per day (or Mboepd) in 2Q15 over 3,840 Mboepd in the previous-year quarter. ExxonMobil’s natural gas production declined marginally in 2Q15, following regulatory restrictions in the Netherlands.

In 2Q15, the upstream projects that led to higher production were the Kearl oil sands expansion project in Alberta, Canada, and the Cold Lake Nabiye project expansion in Alberta. Among the major US unconventional oil and gas plays, XOM’s net production in the Bakken, Permian, Ardmore-Woodford, and Marietta shales increased more than 20% in 2Q15 from 2Q14. At Banyu Urip in Indonesia, XOM achieved 80 thousand barrels per day (or Mbpd), and is expected to reach peak production of more than 200,000 Mbpd by the end of 2015.

Next, we will discuss ExxonMobil’s downstream segment performance.

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