Exxon Mobil (XOM)

It is no surprise that the world’s largest oil company would report record secondquarter earnings of $11.68 billion, or $2.22 per share, but what is surprising is that production dropped 8% from the year-ago period, the largest decrease in at least a decade.

Even excluding the effects of Venezuelan expropriation, the Nigeria labour strike and lower entitlement, volumes would’ve resulted in a production drop of 3%.

This is a re-occurring theme among companies and countries that is under-reported by the media and is a major reason why we remain long-term bulls on oil prices.

“They are not growing,” said one analyst. “Production is becoming more and more of a concern. For these guys, access to reserves is a very big issue.”

Exxon’s capital expenditures rose 38% while margins in its refining and chemical units fell. Analysts expected EPS of $2.46.

Although Exxon has released statements affirming its belief that peak oil won't be a problem anytime soon, the fact remains that oil is not nearly as plentiful a resource as it has been in the past. That Exxon is even considering oil sands projects says something about the state of oil availability today. If gas prices drop even a little more, riskier (more expensive) projects become unprofitable. Exxon and OPEC probably won't be able to jack up prices as much as they'd want to, either--alternative fuels and energy sources are getting to be a big thing and while they probably won't immediately take a huge chunk out of the gas market, shifts in public perception and accelerating alternative fuel technology is sure to generate a much more defiant, empowered, and less forgiving corporate and consumer market if gas prices jump.

Exxon may develop its technology all it wants to, but the double whammy of more expensive E&P and alt-fuel pressures on gas margins will probably mean a plateau (if not an actual decline) in earnings growth. And as stockholders, we don't need a full-out Exxon earnings loss to lose money--for skittish investors, the slightest faltering in Exxon could mean a mass withdrawal.

Exxon is still a dirty word with many environmentalists and socially conscious investors, even more than 18 years after Valdez. Environmental risks are always present with oil firms. With all the easy oil already tapped, the company is being forced to more exotic geographies and into relatively unstable countries to find growth opportunities. We think margins will probably get squeezed by higher foreign taxes as access to far-flung resources becomes increasingly precious. Oil is a commodity with volatile and unpredictable prices, and oversupply can greatly sap profits. If OPEC lost its grip and oil prices fell, industrywide returns would suffer. The runup in oil prices over the past few years has emboldened oil-rich countries to demand more control and a greater percentage of the profits from national oil and gas fields. This trend could limit Exxon's investment opportunities, given the firm's high required rate of return.

ExxonMobil may face increased political risks from new growth opportunities, many of which coming from politically unstable countries.

Exxon is barred from production and exploration in Iran, which holds the second-largest reserve of traditional crude in the world.

In March 2008, a British judge cancels order to freeze $12 billion in Petroleos De Venezuela SA assets. When Exxon Mobil (XOM) won a judgment to freeze $12 billion in the assets of Petroleos Venezuela SA, it was considered a major victory for the Big Oil company. Now, however, XOM is experiencing a setback in its fight against the state-controlled oil company. A British judge has canceled the order to freeze PdVSA's assets.

It was widely considered that the asset freeze was part of the reason oil prices soared to more than $100 a barrel, as Hugo Chavez, president of Venezuela, threatened to stop shipping oil to the United States. Now, however, oil prices continue to climb on their own (after a drop yesterday), despite the reversal.

Exxon's windfall profits are a result of record oil prices that no longer exist - oil prices collapsed with decreases in demand as a result of the 2008 financial crisis and resulting recession. Not only does this bring down revenue, but many of Exxon and other oil company's investments - in advanced drilling technologies, deep-sea oil drilling, extracting oil from "shale" - can no longer make money at current prices. The good times are over - at lease for the next few years until the economy recovers and we become energy-constrained again.

In all of the discussions about Exxon's windfall, record profits, which are owned ultimately by Exxon's shareholders, nobody ever discusses how Exxon shareholders have been doing lately. So let's ask the question: With oil and gas prices at record recent highs (rising 50% this year), with Exxon profits at record highs, how is the average Exxon shareholder faring?

Well, not too well really. If you had bought one share of Exxon at the begining of the year, you would have paid $94, and you would have received a $0.35 dividend in Febuary, and $0.40 dividends in May and August, for a total of $1.15 in dividends this year. Exxon at $80, would mean that your annual return this year from holding Exxon stock would be -13.7%, and a $1,000 investment in Exxon on January 1 would now be worth only $863. Seems like more of a windfall loss than a windfall gain for Exxon shareholders.

Congress is considering moving funding from Big Oil to alternative energy. Right now, one of the ways Big Oil builds on its record profits is to enjoy billions of dollars in tax breaks and subsidies from the U.S. government. However, with gas prices rising, and the summer rally finally underway with crude oil prices, some on Capitol Hill feel that the free ride for Big Oil has gone on long enough. June 19 marks the introduction of a bill that would take $14 billion from Big Oil over 10 years and give it to alternative energy. Not only that, but some Senate Democrats are prepared to start charging royalties from oil and gas drilled in federal waters. Right now, Big Oil gets to drill in government-owned waters without having to pay a dime in royalties, further contributing to profits.

Companies like Exxon (XOM) and lobbying groups like the American Petroleum Institute are protesting, as one would expect. They say that taking money away from oil exploration and drilling in the U.S. increases our energy dependence. Those that support the bill, of course, say that, in the long run, investing in alternative and renewable energy will prove to break us free from foreign oil needs.

In Sept 2008, Exxon was forced to shutdown 26,000 barrels per day of liquids and 130 million cubic feet per day of natural gas production in the Gulf of Mexico due to Hurricane Ike.

Exxon is barred from production and exploration in Iran, which holds the second-largest reserve of traditional crude in the world.