Exxon Mobil: A Well-Oiled Machine?

Despite price volatility, the energy giant is setting profit records. But some analysts say it needs to get with the (green) times

by Moira Herbst

As integrated energy companies trot out their 2006 earnings reports, it's abundantly clear that high prices have yielded rich returns for Big Oil. Exxon Mobil (XOM), the world's largest publicly traded energy company, on Feb. 1 reported the largest annual profit in U.S. corporate history. It netted $39.5 billion, a 9.3% boost from 2005, despite a slight drop in fourth-quarter net income. The same day, Royal Dutch Shell (RDS.A) announced annual net profit of $25.44 billion, following ConocoPhillips' (COP) Jan. 24 report of its most profitable year ever, netting $15.55 billion in 2006.

But oil prices have lately been swinging like a light pole in a hurricane, dipping and rising amid warm weather, ample inventories, OPEC cuts, and geopolitical instability (see BusinessWeek.com, 1/29/07, "Barrels Of Confusion").

Add to that political pressures building for alternative fuels and carbon emissions caps, and oil companies are likely to experience a less buoyant 2007, analysts say. Firms like JPMorgan (JPM) and Friedman, Billings, Ramsay & Co. (FBR) have lowered crude oil price forecasts for 2007 and cut their fourth-quarter income forecasts for integrated oil companies.

Diverse and Durable

However, analysts also say that while profits could slip in the future, Irving (Tex.)-based Exxon will be best positioned among the oil majors to weather the potential storm of lower fossil fuel prices. That's because of the rich diversity of its interests: oil exploration and production, refining and marketing, and chemicals.

"Exxon is by far the most resilient to oil and gas price falls because they have other businesses not directly impacted by oil prices," says Fadel Gheit, senior energy analyst for Oppenheimer & Co. Gheit says this safety net is why investors are unlikely to run from Exxon even as integrated oil looks less attractive as a whole. "It's the flight-to-quality syndrome. When people panic amid volatility they seek higher ground," he says.

Analyst Jacques Rousseau of Friedman, Billings, Ramsey agrees. He says the last calendar year that Exxon was the top-performing stock among Big Oil companies was in 1998, when crude oil, natural gas, and refining margins were all in decline—a similar pattern to what happened in 2006.

Not Bulletproof

Of course, that doesn't mean Exxon Mobil is immune to price dips, says Rousseau. "Obviously, if oil prices went to $50 or $40, that's not good for the company; the majority of its earnings are in the oil and gas part of this business," says Rousseau. "The point is, it's more insulated than others." In the past three "defensive" years when Exxon was the top-performing Big Oil stock (1991, 1995, and 1998), its share price gains lagged those of the Standard & Poor's 500-stock index.

Still, since the end of the 2006 third quarter, Exxon Mobil shares are up 10.4%, outperforming the Chicago Board Options Exchange's oil index, which has risen 8.8%. And Exxon's record $39.5 billion profit ($6.62 per share) stemmed from strong results in every business segment, the company reported, including an increase in exploration and production earnings of $3.5 billion over last year, to $26.2 billion.

Despite the sunny yearend figures and a solid share price, Exxon posted a decline in fourth-quarter income, which indicates that the company is not entirely bulletproof when it comes to problems like weaker demand (see BusinessWeek.com, 1/10/07, "The Oil Market's Obsession"). Exxon reported net income of $10.25 billion, or $1.76 a share, for the fourth quarter, down from $10.71 billion, or $1.71 a share, a year earlier.