Exxon Mobil Corporation (XOM) Q1 2007 Earnings Report, Transcript and Summary

Good day and welcome, everyone, to this ExxonMobil Corporation first quarter 2007 earnings conference call. Today’s call is being recorded. At this time, for opening remarks, I would like to turn the program over to the Vice President of Investor Relations and Secretary, Mr. Henry Hubble. Please go ahead, sir.

Thank you. Good morning and welcome to ExxonMobil's teleconference and webcast on our first quarter 2007 financial and operating results. As you are aware from this morning’s press release, we have had another strong quarter. Our integrated portfolio of businesses has performed well, enabling us to capture the benefits of strong industry conditions. While commodity prices were lower in the quarter and we saw the impact of warm weather in Europe on natural gas demand, our upstream earnings remained strong and our downstream and chemical businesses delivered excellent results. Before we go further, I would like to draw your attention to our cautionary statement. Please note that estimates, plans and projections are forward-looking statements. Actual results, including resource recoveries, volume growth and project outcomes could differ materially due to factors I discussed and factors noted in our SEC filings. Please see factors affecting future results and the Form 8-K we furnished this morning, which are available through the investor information section of our website. Please also see the frequently used terms, the supplements to this morning’s press release, and the 2006 financial and operating review on our website. This material defines certain financial and operating terms I will use today, shows ExxonMobil's net interest in specific projects, and includes information required by SEC Regulation G.

(Operator Instructions) Our first question will come from Paul Sankey with Deutsche Bank.

I had a kind of big question on the subject of the dollar. Could you try to help us understand the extent to which shifts in the dollar have perhaps affected your earnings this quarter? Any other sensitivities you could give us in that direction would be very interesting. Thank you.

If you look at the for-ex effects in the quarter, year-on-year comparison, it was about $220 million associated with for-ex across all of the business lines. About $135 million of that was in the upstream, minor effect, downstream about 20 and chemicals 60, so that makes up the total there.

Is there any way of thinking about -- I guess we could just at the way the dollar has changed on a purchasing power parity basis, or how can we work that into the sensitivity for every dollar change in the exchange rate?

I do not really have a rule of thumb I can give you on that.

Fair enough. On your CapEx, that’s the second question, that is notably down. Is it possible to break down the extent to which that was in the sub-sectors? You know how your CapEx has changed, any extra detail on upstream but also just between the sub-sectors? Also, just if you could talk about the outlook for the full year against what you outlined. Thanks.

When you look at CapEx, most of the impacts that you see in a quarter are on a quarter-to-quarter basis. There is just variation that you get in the timing of expenditures and there is a breakdown in the supplemental data that just goes through the actual spend and by each of the -- by upstream, downstream and chemicals, both U.S. But if you look at our full year outlook, it is unchanged from what we guided earlier, about $20 billion. Again, it is really just a matter of timing. Projects are moving ahead on schedule. We don’t really have any issues in that regard at all.

Our next question will come from Nicky Decker with Bear Stearns.

Henry, on Venezuela, there are news reports out yesterday that ExxonMobil, among others, participated in a signing agreement ceremony to hand off operations. Would you confirm this, number one, and elaborate maybe on the decisions that were made and what decisions are pending?

As was described at the analyst meeting, we are really on a parallel path, two parallel paths here. One is to have an effective hand over of operations May 1st to the Venezuelan Government, and that is what you were reading about in the press, was basically progress in that regard. That has really been our main focus at this point, is to make sure we have a safe hand over of the operations and working with the personnel that will be taking over there, and any signing that was associated with that. There is still work to be done and that is not at all resolved as to compensation and maintaining shareholder values. Those negotiations are continuing and will be for some period of time yet.

Henry, does this signing yesterday, should we take that to mean that ExxonMobil plans to stay in Venezuela?

I would not speculate one way or the other on that. It is going to depend on the negotiations that go forward. All we are doing is basically making sure that we have things ready for hand over and have that proceed as smoothly as possible.

We will go next to Doug Terreson with Morgan Stanley.

Congratulations on great results, Henry. My question regards demand, specifically ExxonMobil's refined product sales were flat on a year-over-year basis, with strength in the U.S. offset by weakness in Asia. I think that same trend was present last quarter, too. I wanted to see if there was any color that you could provide as it relates to rate of change in demand that you guys are experiencing in those two regions. You did talk a little bit about weather in Europe. If you could provide some color versus the year-ago period or sequentially I would appreciate it.

If you look year-on-year, we are seeing year-on-year demand increases and really, that is -- if you look at where that is occurring, and again it correlates back to, over the longer haul, to economic growth. In a quarter-to-quarter kind of comparison, a lot of things can influence that and it is really hard to determine and you will see revisions to numbers as people continue to talk about it, but we are seeing strength in product sales in the U.S. and the Asia-Pac area in particular. Of course, we saw in the first quarter some impacts associated with weather on distillate sales and you see some higher inventories there, but a lot of this reflects the higher through-puts that we had in refining and additional sales associated with that.

Okay, and also on the Fujian refining and petrochemicals, I think that the press release initially suggested start-up in early 2009, which seems pretty quick to me given the circumstances. My question regards whether or not that timetable is still valid, and if not could you provide your updated expectations for start-up at that plant?

2009 is what we have out there at this point and we will be working that -- there has been a lot of up-front work done on the project, so basically we feel pretty comfortable about our execution plans there. So it will be moving ahead.

Okay. I know it’s been in the pipeline for a while. Thanks a lot.

We will go now to Doug Leggate with Citigroup.

Thank you. Good morning, Henry. Henry, a couple of things from me. One is kind of more thematic, I guess. Your refinery runs were fine this quarter but there seems to be an awful lot of noise around unplanned downtime. Exxon I guess has been mentioned once or twice in that regard. Are you seeing anything specific in terms of how your refinery business is coping with all the specification changes, the wealth of implementation I guess over the last year. I am thinking in the context of effective utilization rates may be going back a little bit just on the margins. Just a general view on that would be great.

If you look, we had very strong performance. Throughputs were up, good reliability performance during the quarter. We are not seeing anything. We are running the refineries full but as a former refiner, that really does not impact the reliability of the operations. We focus on taking things down as appropriate for maintenance, and a lot of programs associated with that to enhance reliability. But the specifications are a challenge in that you have to meet those and get them all the way through to the delivery system, but we have not really had any problems in that regard and don’t foresee any in our own operations.

Great, and I guess my follow-up is maybe if you could just break down a couple of the tax items you mentioned at the corporate line, and maybe a run-rate that you would expect for that line for the balance of the year.

If you look at the tax items, there isn’t anything specific to point out. There are a lot of, as you know, because we are very large, we have a lot of different tax jurisdictions around the world. There’s frequently impacts associated in tax but I would not characterize it as anything that is particularly noteworthy in terms of an individual item. So there is nothing really I have to highlight there in particular. If you look at the guidance on the corp and fin side, there is variation in those. There are a lot of components that go into the corp and fin numbers -- headquarters costs, pension costs, interest rates and payments there, so that is what is causing some of the variation that you see. We still guide in the $50 million to $100 million of costs, maybe toward the lower end of that.

That’s great. Thank you.

Dan Barcelo with Banc of America, your line is open.

Good morning. I have a question regarding the downstream; on a year-over-year basis, you had refining throughput as mentioned before was up strongly, around 2%, 5% in the U.S. When I look at the downstream earnings guide though, there I look at the volume mix and I see that only contributed about $50 million in earnings. I don’t know if you can give a little color on should we have seen more of an effect on earnings because of the significant throughput, or does mix offset that?

Well, there are some offsets in there. There is a bit of -- it was actually, if you -- again, you were looking at the first quarter versus first quarter last year?

That’s correct.

So if I’m looking at it, the refinery ops impact was actually more positive than that. There was some negatives associated with volumes in the marketing side of the business, largely associated with the divestments that we have had there. And then you also have turnaround impacts that have some impact and the unit mix of the turnarounds that were associated with that, but no, there’s -- the operations actually we feel very good about and that’s performing well.

Great. Just for the follow-up, a very subtle question in terms of in your statement, you say that you will do a buy-back from time to time in the open market, but you always refer to through negotiated transactions also as an option. By that wording, does that include something of the like like a Volero has done today with an accelerated share repurchase, or do you mean something totally different?

All of our share repurchases have been done on a rateable basis, daily rateable basis and that has been our ongoing -- and basically it’s -- we don’t anticipate changing that, but obviously you have options but all of ours have been on a rateable daily basis.

Perfect. Thanks very much.

Our next question will come from Mark Gillman with the Benchmark company.

Good morning. I wanted to see if we could get a little bit of clarification on two production volume items. First, with respect to the Middle Eastern gas, the number was quite strong. I wonder if you could just give me an idea what that number reflects in terms of Al Khaleej and where the ramp-up on that stands and whether it reflects RasGas 5 and the production facilities that you have referenced on a full basis.

As you point out, we were up almost 400 million cubic feet a day there, if you look first quarter versus fourth quarter. The big impact or the largest single impact associated with RasGas train 5 start-up, also had strong performance with the other Qatar projects. We have seen stronger local sales associated with the Al Khaleej project there and basically we are at record rates post the hybrid issue that we had earlier.

My other volume question relates to the African liquids. The number continues to be lower than what I would have thought, especially given Dahlia, which should have added materially. The number is essentially flat with the fourth quarter. Were there any PSC related effects that occurred in the first quarter that might have offset the positive impact of Dahlia?

You see the new -- as we point out, we feel very good about the new projects, both Erha and Dahlia had positive impacts relative to prior periods. We do have cumulative effects of entitlements, and that is not always associated with current price rises. You also are meeting tranches as you go through, as you know, with these, as you accumulate to get to cost current position in various contracts and so on. So that is also impacting, it was about 70 a day in Africa associated with those kinds of effects. Then there is also maintenance and reliability, improvement activities that are going on in the period as well. But the projects, just back to the bottom line, the projects are all performing very well and we feel very, very good about them. The other point I would make too is when you look at entitlement effect and impacts in general on PSCs, and they are all a reflection of positive things. It is either better performance, higher prices, all basically delivering higher returns for those projects.

We will go next to Mark Flannery with Credit Suisse.

We’ve heard a couple of people this quarter talk about the difficulty in meeting benchmark refining margins or the impacts from lower spreads here on the refining business. I have a two-part question; first is what is your comment with regard to Exxon on that? Secondly, can you split out refining and marketing, either indicatively or with a number for both the U.S. and international?

I do not really have a split for you on refining and marketing earnings overall. I can tell you that if you look at the margin impacts associated in the first quarter versus first quarter, which is the biggest component in the change, there is about two-thirds of that associated with rising marketing margins and about a third of that associated with refining margins, to just give you a feel. In terms of the margins that we saw overall though, we continue to process, of course take advantage of the optimization capabilities and the crude flexibility that we have, so we have not really seen something I would attribute to a major offset associated with mark or benchmark crude issues. We are constantly optimizing the crude we are running and making sure that we are getting the runs with the best margin into our facilities, so I cannot really point to anything there that I would say was an issue.

Thank you very much.

We will go next to Oswald Clint with Sanford Bernstein.

Good morning. Just one question on divestments, please. Is it possible just to give a little bit of [insight] on the cash for the seals of subsidiaries in the quarter, if that was primarily the upstream, and if we would expect continued divestments through the rest of the year, and for that number to step up?

If you look at the overall impact of divestments, they are small. They are down relative year on year, and -- I guess on a quarter-to-quarter basis about flat but down versus where we had been averaging in the prior periods. I would just say that that’s more of a reflection of we have a certain, we have a level of ongoing activity. We are constantly looking at assets, whether they are worth more to others than they are to us in the marketplace. I would tell you that we have worked through a bit of an inventory of mature facilities here, so I would see us more at a lower ongoing rate, but nothing else really to focus there. We continue to focus on managing those assets to generate long-term shareholder value and maximizing the value on high-grading our portfolio.

Thank you.

Your next question will come from Paul Cheng with Lehman Brothers.

Two simple questions; one, in your press release you are saying you are down 2.8% year over year, but excluding the PSC sales and the OPEC quota, you are up about 1%. Do you have a breakdown? That is a downturn of roughly about 4%. Is it evenly split on those three factors or one is weighted more heavily than the other?

Entitlements are the biggest single factor in there, and that was about -- it actually was the bulk of it, 115 associated with that, or KOEDs associated with that. And then if you look at the others, they are about evenly split between the two, quotas and divestments.

Can you give us an update; how is the Piceance basin, the fast drilling. How is that program? Is there any change in your target in terms of reaching roughly about 400 million cubic feet per day by the 2010, 2011 timeframe? Also, if I can sneak in one quick one, what is the price finalization impact in the quarter?

The price finalization effects, if you look on a total absolute basis, they were very small. I think it is like 10 for the entire company, so it is really, really small. Looking at -- on the Piceance, basically there is no change to our plans but things are progressing there well and as you may know, we did have approval from Bureau of Land Management, or at least a finding of no significant impact on the progression of the projects, so we are looking at that and moving ahead. And the results, drilling results are all very positive and the technology, as you know, that we are deploying there with both fast drill and the multi-zone stimulation technology also performing very well, so it is all go.

What is the current production rate?

It is about 50. We basically will be adding in as we bring these additional projects on.

Henry, should we assume that it is sort of like a linear function, that to grow for the next several years to reach the 400, or there is more need towards the back-end?

No, there is capacity -- gas handling capacity has got to be brought on and that will have some step associated with it. But you know, we have laid it out, our plans in the F&O, and that is probably the best guidance I can give you.

Very good. Thank you.

Our next question comes from John Herrlin with Merrill Lynch.

Getting back to the Piceance, I believe with the approval from the BLM, they are talking or Exxon is planning 20 pads with nine wells. Is that all going to be done this year?

No, it will be over a period of time. I do not have a breakdown of exactly what the timeframe is.

Okay, that’s fine. Speaking of the F&O, I was surprised to see the lower tertiary mentioned in the Gulf of Mexico. Exxon has never really been a big deepwater Gulf of Mexico player. Is that something that’s of greater interest these days?

Well, as you know, we have several prospects that we are -- we have a lot of acreage in the area and we have several prospects that we are looking at. We have the Julia well that was drilled earlier and we have two more prospects that will be drilled though later in the summer in the fourth quarter. When we bring the Erik Raude down, that will be doing that drilling. So we have a number of plays in the area and acreage throughout the area.

Okay. That’s it for me. Thanks, Henry.

We will go next to Ron Oster with A.G. Edwards.

I have a couple of quick questions. First, I was wondering if you could give us an update on Gorgon with regard to where you stand on contracts and securing the sales agreements, and any update in terms of the timing of the project that you might be able to provide.

Well, as you know, we are not operating that project. Chevron is. That is probably better directed to them on the timing. But we continue to work with the operator. We are going through the process of looking at basically the best path of execution there, or concept of development, and so that is where our focus is. We are working with the operator on it. As far as sales contracts, we continue to look in the market but we are not in any particular rush on that at this point.

Just one follow-up on the chemical segment, this tends to be a hard area to project, given the integrative nature of your assets. Historically, it has been all over the map but recently it has averaged in the area of $1.2 billion to $1.3 billion over the last few quarters. I was just wondering if you could comment if this has been a pretty normal operating margin environment and if this might be a good base case to use going forward?

I am not going to give you a forward projection on earnings. It is a cyclical business, and as you have no doubt seen in our results, it also has many cycles within the main cycles, depending on what is going on in price movements, feedstock price movements and people’s buying patterns, so we often see shifts in that in the buying patterns in the Asia-Pac area. But if you step back and you look at our business, we have strength right across in our chemicals business and it starts from the integration that you mentioned with the refineries and our upstream, so we look for advantage feedstocks. We have very close integration with molecule management and others. We have a very strong portfolio of products -- both specialty and commodity, and those specialty products you’ll see will provide us with an up-lift in our returns and a stability associated with our returns because they are a more stable margin and volume business. In the current timeframe, which I would have to say are more peak-like conditions, aromatics have been doing very well, our commodities business has been very strong throughout this period. But it is cyclical.

Thank you.

Gene Pisasale with Mercantile Capital, your line is open. Please go ahead.

Henry, great quarter. The question that you answered earlier is really more of a follow-up for me, and that is the sourcing of purchased crude around the world, one of your competitors seemed to have had a little bit of a glitch from sourcing somewhat higher-priced crude at the expense of their first quarter margins versus some potentially lower-priced crude. I wonder if you could just talk about how flexible you are on an operational and a strategy basis for purchased crude around the world, or if you want to maybe talk about a specific region where you may be more flexible than others. Because Brent seems to be trading at quite a bit higher than what it typically trades at versus WTI, and that has been a surprise to some people.

We manage our supply and our crude purchasing business on a global basis and the organization is constantly focused with the refining organizations to be able to optimize those crude purchases and sales, so you will see us selling out crude that we produce because we can get higher value for it, buying additional grades and constantly managing that with a focus on new crudes to refineries where we see advantages in those, advantaged or lower cost crudes, whether it is high sulfur. Of course, the whole molecule management system that you have heard us talk about before does provide us with capabilities of better planning and estimating the value of various crudes into our refineries, such that we are able to make these decisions very rapidly. So we are constantly optimizing it and maintain that approach. But it is basically a very important piece of our business and globally optimized.

Thanks very much, great quarter.

We will go now to Mark Gillman of Benchmark.

I wonder if you could comment on a couple of upstream factors that might influence the overseas result, which was lower than what we were looking for. Were there any U.K. mark-to-market gas contract impact in terms of the first quarter? Were there any lifting issues relative to production that impacted results in the first quarter? Finally, any asset sales gains that might have distorted comparisons, looking back at either the year-ago or the fourth quarter?

In terms of the liftings and patterns around that, really the real big impact was associated with the warmer weather in Europe. If you look at the gas demand there, that was the big piece. You know, we are a big player in Europe, a big gas player in Europe, and you did see and typically see a lot of seasonal variability, so we do end up with a big impact or a significant impact when there is a big swing in the degree day change in the quarter. We saw, if you look quarter on quarter, first quarter versus first quarter, we were down 25% on degree days in that quarterly comparison -- 20% warmer than normal. That was the real big impact for us in the period that I would say was unusual. You also saw that reflecting back through in some of the distillate inventories, as I mentioned earlier. You will see they are quite high in Europe right now.

No mark-to-market effects?

No, nothing there.

Okay, thanks, Henry.

At this time, we have no other questions standing by on our question roster. I would like to turn the conference back to our speaker for any additional or closing comments.

I would just like to thank everybody for tuning in today and for the questions and discussion period that we have had. Thanks again.

Thank you, everyone, for your participation in today’s conference. You may disconnect at this time.