Exxon Earnings Slip Temporary if Natural Gas Beats Crude Oil as Future Energy Source

Joel Anderson |

Exxon Mobil (XOM) reported earnings Thursday and showed slipping profits across the board. The company's earnings miss appears to come, at least in part, from plunging prices for natural gas, displaying what could be part of a trend for the industry as a whole towards natural gas driving profits as much if not more than oil.

Profits Down 11 Percent in Q1 of 2012

Exxon reported earnings of $9.45 billion, or $2 per share, for the first three months of 2012. This is a marked downturn from last year when it reported profits of $10.65 billion, or $2.14 per share, for the same period. Much of this can be attributed to the rock-bottom prices for natural gas that the fracking boom in the United States has brought on. The average price Exxon sold natural gas at was just $2.74 per thousand cubic feet, off 20 percent from the same period in 2011.

The company also showed declines in production for both crude oil and natural gas. Earnings on exploration and production were down 10 percent to $7.8 billion on a 7.7 percent drop on oil production and 3.3 percent decline in natural gas output.

"When you get as big as Exxon, it's hard to keep growing," said Howard Weil analyst Blake Fernandez. "There's only so many projects you can take on at the same time."

Natural Gas Profits Could be the Future

Exxon was most recently in the news for its massive deal with Russia's Rosneft (RNFTF) to explore Arctic and Black Sea oil fields, but there's growing evidence that companies like Exxon and Royal Dutch Shell (RDS.A) are placing the future of their companies with natural gas. Chris Kahn of the Associated Press writes that Exxon didn't cut production at its natural gas rigs amidst the plunging prices like competitors Chesapeake Energy Corporation (CHK) and ConocoPhillips (COP) did. However, Kahn notes that Exxon may be shifting its focus for the long term.

"The Irving, Texas, energy giant so far has been willing to take a short-term hit to its bottom line," he writes. "It believes natural gas demand will pick up in coming decades and replace coal by 2025 as the second most popular energy source behind crude oil. When demand returns, Exxon should be ready. It bought XTO Energy in 2010 for more than $30 billion to become America's largest natural gas producer."

Shell, meanwhile, expects to see natural gas production outpace that of crude oil in 2012. Both companies appear willing to suffer through short-term hits to profit to position their companies to succeed in the future. Exxon shares fell 0.90 percent Thursday on the earnings miss, showing that its investment in natural gas won't be without pain. However, Shell managed to post a 3.83 percent gain on Thursday after its earnings report beat expectations.

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Symbol Name Price Change % Volume
CHK Chesapeake Energy Corporation 6.68 -0.23 -3.33 88,101,772
COP ConocoPhillips 41.54 0.05 0.12 5,553,212
XOM Exxon Mobil Corporation 86.62 -0.59 -0.68 10,736,170


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