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How Do Falling Oil Prices Impact ExxonMobil’s Earnings?

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Oil prices and ExxonMobil’s earnings

ExxonMobil (XOM) has three main segments, namely upstream, downstream, and chemicals. Upstream produces oil, downstream refines the oil, and chemicals further processes it into petrochemical products. In the entire value chain, crude oil plays an important role as it’s the product of the upstream segment and the feedstock for the downstream segment. So, changing oil prices affect both business segments inversely. Usually, a rise in oil prices will be beneficial for upstream and detrimental for downstream, and vice versa.

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Falling upstream segment earnings

Changing oil prices have changed segment dynamics within ExxonMobil (XOM). Earnings from the upstream segment have fallen steeply. The upstream segment that contributed 80% of the total earnings in 3Q14 now contributes 32% in 3Q15. Earnings from upstream have fallen by 79%, to $1.3 billion, in 3Q15. This is on the back of falling crude oil prices. Brent prices that averaged $102 per barrel in 3Q14 slipped down to $50 per barrel. The situation is similar for peers BP (BP) and Royal Dutch Shell (RDS.A).

Rising downstream and chemical segment earnings

On the other hand, the earnings of the downstream and chemical segments surged. From 3Q14, downstream’s earnings doubled to $2 billion in 3Q15 and the segment contributed the main portion of earnings for the quarter. From 13% in 3Q14, the downstream segment contributed 48% of earnings in 3Q15. Similarly, the chemical segment’s contribution rose from 15% in 3Q14 to 29% in 3Q15.

This shows that the fall in crude oil prices has altered the segment play in XOM.  No doubt, overall earnings have slumped, going from $8 billion in 3Q14 to $4 billion 3Q15.  But, the downstream and chemical segments have notably resisted the fall. Given the current falling oil prices, these segments are earnings saviors for XOM.

You can consider the iShares US Energy ETF (IYE) that contains ExxonMobil (XOM) and Chevron (CVX). The ETF has a 42% exposure to integrated energy sector stocks.

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