Exxon Mobil Corporation (XOM) May Continue to Underperform

The era of cheap oil is over
While Exxon Mobil Corporation (NYSE:XOM) operates as an integrated oil and gas company, the upstream segment accounts for about 74% of earnings after tax. The company’s profitability is, therefore, largely tied up with its exploration and production activities.

Crude oil and natural gas liquids production fell 3.5% in the first quarter year over year. On an annual basis, total liquids production fell 11% to 1.99 million barrels a day in 2012 from 2.2 million bpd in 2010. More importantly, production costs have soared. Average cost of producing crude oil and NGLs stood at $100.7 per barrel in 2012, a whopping 36% jump from 2010 cost levels.

Clearly, Exxon’s legacy assets aren’t able to keep up production levels. These gigantic assets bases need more coaxing in order to keep production volumes stable, resulting in higher expenditures. Moreover, with unconventional resources proving to be much more costly, producing crude oil cheaply is soon becoming a part of history.

While major investments are under way, margins should likely remain suppressed unless crude oil prices shoots through the ceiling. The latter isn’t an impossibility with crude prices currently nearing $110 per barrel.

Also, a company like Exxon Mobil Corporation (NYSE:XOM) cannot be written off in a hurry. Exxon’s strength lies in its efficiency, deep cash reserves, and shrewd management. Many of its current projects are ambitious. The company is also betting big on natural gas. Exporting LNG to Asia could be a profitable move, at least for the next five years.

Of course, rising crude oil prices continue to be Exxon’s biggest driver to improve margins. But whether this stock is capable of outperforming the broader markets still remains a $400 billion question. Long-term investors should carefully watch this stock.

The article ExxonMobil May Continue to Underperform originally appeared on Fool.com and is written by Isac Simon.

Fool contributor Isac Simon has no position in any stocks mentioned, and neither does The Motley Fool.

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