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Exxon Mobil Corporation (XOM), Chevron Corporation (CVX): Structurally Unsound Investments

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Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) missed earnings expectations by a very large margin this past quarter. This indicates that all is not well with Big Oil.

What’s going on?

Source: EIA

Source: EIA

Gasoline supplied in 2012, and 2013 is below the five-year average. Just because oil markets can increase total market supply, doesn’t necessarily mean it always does. The market for oil is usually colluded, and total production is increased based on profit maximization. However, one of the things that have made it difficult for OPEC countries to exhibit price control is the improving fuel economy of cars.

Source: University of Michigan

Source: YCharts

The average fuel economy has improved 17.7% over the past five years; correspondingly the U.S. crude oil and petroleum supplied (used as a proxy for consumer consumption of gasoline) was down 3.74% over the same five year period. Meanwhile, market supply has increased 49.52% while prices have remained stagnant over the past three years. The increase in supply was exported to emerging markets.

In the second quarter of 2013, rising fuel economies started to catch up with two of the major oil giants, as the companies found that reaching an end-market for crude oil was becoming increasingly difficult. The push to more fuel efficient vehicles is starting to take its toll, and the speed at which it is being done is significant enough to materially affect the whole oil industry.

Source: Statista

Hybrid vehicle sales have started to pick back up in 2012. A greater mix of hybrid vehicles will make it difficult for the oil companies to generate higher rates of profitability. By 2016, the Federal government has set a mandate that the average fuel economy for a car has to improve to 35 mpg, and a truck to 28 mpg. The average fuel economy is estimated to be 24.5 mpg as of January 2013.

ExxonMobil bombed


Source: ExxonMobil

On a global basis, Exxon Mobil Corporation (NYSE:XOM)’s refining output declined from 4,982 thousand barrels per day to 4,466 thousand barrels per day.

Exxon Mobil Corporation (NYSE:XOM) blamed its poor performance on declining demand for crude oil. The company’s revenue declined $21 billion year-over-year. The company could not offset falling demand with cost cutting because the oil-industry is notorious for having a lot of fixed costs. The company reported earnings per common share of $1.55 (year-over-year decline of 55%). Analysts were expecting the company to report earnings per share of $1.90. The company missed the consensus expectation by 18.4%.

Chevron gets dismantled


Source: Chevron

The company’s reported revenue from the upstream and downstream segments declined. The company could not offset the decline in revenue with cost cutting. John Watson (CEO of Chevron Corporation (NYSE:CVX)) stated:

The decrease was largely due to softer market conditions for crude oil and refined products. Earnings were also reduced as a result of repair and maintenance activities in United States refineries.

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