February 3, 2019

Breakingviews: Exxon’s earnings beat creates its own headwinds

by Breakingviews.

Try as he may, Exxon Mobil Chief Executive Darren Woods won’t be able to escape a glut of his own making. The world’s largest independent, publicly traded oil company said Friday that its production is booming in Texas while discoveries in Guyana are swelling. That helped the company beat earnings expectations in the latest quarter, but it also creates headwinds that may limit future success.

By many measures, Exxon is firing on all cylinders. Production in the West Texas Permian region, where it has invested actively over the last two years, jumped 90 percent. The $320 billion company also made its 10th discovery in Guyana, a territory where it expects to produce more 750,000 barrels per day by 2025, the equivalent of nearly a fifth of its current output. Woods announced plans earlier this week to streamline upstream operations, the business groups that produce oil and gas, paring its seven divisions down to three. That focus should help boost profit, the company says. In the fourth quarter last year, earnings excluding the effects of taxes and other items jumped 72 percent from a year earlier.

But there are cracks in the story. Oil prices fell during the quarter, largely due to ample global supply and worries about economic growth. That contributed to a big drop in profit in the company’s U.S. upstream business in the quarter. Chevron, which also announced earnings, mimicked the pattern. Higher natural gas prices offset some of the pressure last quarter, but with Permian production costs facing upward pressure, any continued weakness in crude prices could easily become a problem.

Meantime Exxon’s big boast is its presence in two of fastest-growing oil producing areas. In addition to its gusher in Guyana, the company estimates its production from the Permian will rise to 600,000 barrels per day by 2025. Chevron is also working its pumps hard – production was up 84 percent in the Permian in the latest quarter.

If a positive outlook for oil were a sure thing, Exxon would be well positioned with its big investments in those areas. But its competitors are inching in other directions. On Friday BP said it was going to expand disclosures on greenhouse gas emissions as it responds to shareholder pressure on climate change. Exxon’s one-track mind focused on higher production risks leaving it swimming in a less-valuable commodity.

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