Conocophillips (COP): We Should Have Seen Exxon Mobil Corporation (XOM)’s Bad Quarter Coming

It’s not very often that we see a company like Exxon Mobil Corporation (NYSE:XOM) earnings drop by 57% from the previous year. In all honesty, though, we should have all seen it coming. While a large portion of that epic drop isn’t much to worry about, there are a few items that investors should be aware of. Let’s break down this earnings flub and see how if we can gather some insight into how it will affect Exxon Mobil Corporation (NYSE:XOM) in the future.

Exxon Mobil Corporation (NYSE:XOM)

A Tale of Two Quarters
The biggest reason Exxon Mobil Corporation (NYSE:XOM)’s management gave for the large drop in earnings is from restructuring its Japan assets. This statement is actually a little deceiving, though. It wasn’t that the company realized a large loss this past quarter when it spun off its Japanese refineries and chemical plants, but rather the company realized a $5.9 billion gain on the sale the year prior. By looking at the company’s past six quarters of earnings, we can see that the second quarter of 2012 was just as much an exception as this past one.

ExxonMobil Quarterly Earnings (in $billions) 
Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013
9.45 15.91 9.57 9.95 9.5 6.86

Source: Company 10-K  and recent 10-Q

So adjusting for the Japan deal and the $1 billion gained from selling other assets, the company’s earnings the year prior were about $9 billion. This actually puts the company’s earnings more in line with what it did throughout 2012, so that 57% earnings drop is a little overstated. At the same time, it doesn’t account for the 27% drop from the previous quarter. To understand that, we need to dive deeper into the heart of Exxon Mobil Corporation (NYSE:XOM)’s operations.

A nick here, a scratch there

Normally when an oil company says it lost something in the range of hundreds of millions of dollars in a quarter, investors would be petrified. For Exxon Mobil Corporation (NYSE:XOM), though, a miss of a hundred million won’t break the company. When several of those losses compile over a single quarter, though, it can really add up to something. This quarter we saw declining production from OPEC mandated quotas, maintenance downtime, weak refining margins, and weaker pricing on specialty chemicals. Ultimately, all these small nicks in Exxon Mobil Corporation (NYSE:XOM)’s armor piled up to a $1.6 billion drop in earnings. While there are several reasons for this, almost all of these issues can be boiled down to two drivers.