Petroleum industry leader and Dow-30 component Exxon Mobil (XOM Free Exxon Mobil Stock Report) has reported third-quarter earnings of $1.79 a share, versus our estimate of $1.85 and the year-earlier tally of $2.09. Notably reduced refining margins (a consequence of rising industry capacity) hurt the company's downstream business over the three-month period. On the bright side, combined oil and natural gas production rose as new projects were brought on line and maintenance-related downtime decreased. Corporate returns remain very high, as well, with Exxon generating $7.9 billion in quarterly profits. Investors seemed reasonably pleased with the third-quarter report, overall, and the equity moved slightly higher in the hours just following the report’s release.

In a promising development, on an oil-equivalent basis, production rose 1.5% from the third quarter of 2012. Although that is not a big number in and of itself, we note that the massive scale of Exxon's operations is on par with production from an OPEC nation. As a result, the 1.5% volume advance in the upstream business is a nice achievement. Exxon has been spending enormous sums in recent years to turn around a slow production slide in its drilling business.

Lately, projects coming on line in Canada and Nigeria have provided a lift. The fact that the gains were in oil production, rather than natural gas, meant they were all the more favorably received, given the significant pricing advantage oil has over gas. In sum, these results offer a glimmer of hope that all of the cash going into drilling ventures is hitting pay dirt. Investors seemed reassured by the rise in output and, if it proves sustainable, would likely continue to be looked upon positively by shareholders.  

Performance from the downstream segment was less uplifting, as noted, mainly with respect to refining margins. Profits fell by a sizable $2.6 billion in refining, offset to a degree by a $235 million pickup in the chemical division's bottom line. Prospects for these businesses are mixed over the short term. Industry capacity issues could linger in refining. However, a 5% gain in chemical product sales and higher margins augur well for that business.

Also during the quarter, Exxon purchased 34 million shares of stock at a cost of $3 billion. Another $3 billion worth of stock is expected to be bought back in the fourth quarter. The $3 billion-per-quarter figure for share repurchases is less than the $4 billion-$5 billion in recent years, but is still helpful.

At this time, we are maintaining our share-earnings estimates of $7.50 in 2013 and $8.20 in 2014. Exxon Mobil stock may not turn heads in the near term, but it offers the promise of attractive risk-adjusted returns out to late decade.

About The Company: Exxon Mobil Corp. is the largest publicly traded oil company in the world. It also owns 69.6% of Imperial Oil (Canada). Daily production in 2012 was as follows: crude oil, 2.4 million barrels (+1% vs. ’11); natural gas, 12.1 billion cubic feet (+31% vs. ’11). The average realized 2012 prices in the U.S. were: oil, $55.54 per barrel; natural gas, $3.85 per mill. cubic feet. Reserves as of 12/31/12 were 24.8 billion barrels of oil equivalent, 47% oil, and 53% gas. The reserve life at current production rates is about 15 years. The 10-year average reserve replacement rate is 121%. The daily refinery runs in 2012 were as follows: 5.3 million barrels (-2% vs. ’11); product sales, 6.4 million barrels (flat vs. ’11); chemical sales, 25.9 million tons.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.