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Lower margins and refinery downtime hurt XOM downstream earnings

Ingrid Pan, CFA

Why ExxonMobil missed 2Q13 earnings expectations (Part 2 of 6)

(Continued from Part 1)

XOM downstream earnings

During 2Q13, XOM had downstream earnings of $396 million, compared to $1,545 million in 1Q13.

Lower refining margins

Lower refining margins and unfavorable price timing effects contributed to $170 million of the difference quarter-over-quarter. To a large extent, refining margins are dictated by crack spreads, which represent the difference between the sales price of refined products such as gasoline and diesel and the cost of crude oil. See Crack spread 101 for more on crack spreads. However, XOM stated on its earnings call, “Global industry refining margins were essentially flat with increases in the U.S. margins offset by weakness in Europe and Asia-Pacific.” If worldwide industry refining margins were largely flat, the market likely did not anticipate this degree of underperformance from XOM’s refining business on account of refining margins. Why XOM in particular had lower margins could have had to do with its particular portfolio of refineries, which may have run more crude through in refineries, but refining margins were lower during 2Q13.

No asset sale gains and one-time conversion costs

Another $440 million of the difference was due to the absence of asset sale gains in 1Q13 and costs associated with a conversion of the company’s Dartmouth refinery. The difference due to the asset gains was likely largely anticipated by the market, as asset sales aren’t part of ongoing operations, and gains from asset sales wouldn’t be expected to occur quarterly.

Major refinery downtime due to planned maintenance

The major reason for the miss was refinery downtime. XOM stated that volume and mix effects contributed to $540 million of the decrease, with the figure reflecting significant planned maintenance activities at six refineries in its portfolio. This was likely not expected by the market, and the company noted that it was the highest planned quarterly maintenance activity in five years.

Continue to Part 3

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