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Happy New Year 2011!

I wish everyone a terrific new year, one filled with success, health, and happiness.

I hope this past year has treated you well. The financial markets continued to be challenging with threats of China hitting the breaks too hard, the Euro falling apart, more political fun in Washington, high unemployment, and, of course, overleveraged consumers were doing their best to deleverage.

Unemployment remains unacceptably high, and Bernanke is doing his best to reignite the economy and reduce unemployment. While I have my doubts that money printing and low interest rates are the right course of action, I hope I am wrong and he is right. We would all enjoy seeing unemployment reduced toward normal levels. Although I expect 2011 to be another challenging year, with a little luck and good fortune, we should see the economy begin strengthen.

On Saturday, 28 June 2010, Laine Slowski and I went to Drumheller to our photo shoot. The photo shoot was opportunistic in the sense that we did not have a set game plan. Instead, we headed out to Drumheller, looking for a suitable location. After much driving around, we settled upon a location slightly east of the hoodoos.

Working with Laine was great because she was fun, relaxed, and willing to try different poses. We shot at this general location for a couple of hours, and then headed off for supper. When I last her, she was getting ready to head off with a friend to a warm foreign location for several months. So she is likely missing our cold and instead enjoying their hot weather. I hope she and her friend are having a great time.

On Saturday, 28 June 2010, I photographed Laine Slowski near Drumheller, Alberta. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Today is the first day of winter 2011. I know what you are thinking. Winter doesn't officially start until December 21. You're right, of course. However, I think of winter as beginning today, and then lasting for one hundred days. In early March, according to my schedule, winter ends. So one day down, and just 99 short days left until spring.

Since it is winter, I thought I would show a picture of Anya taken during summer. We headed out to Banff National Park and I took this picture of Anya overlooking the Banff Springs Resort Hotel. I hope summer 2011 is a bit warmer than the summer we just enjoyed.

Switching topics, the markets were certainly wild today, weren't they? The TSX in Toronto was up 195.47 or 1.51%, and in U.S., the S&P 500 and Nasdaq were up 19.47 or 1.64% and 51.20 or 2.05% respectively. People were feeling more optimistic on the back of strong China manufacturing report and similar comments from U.K. and Germany. Many expect the European Central Bank will take positive actions to address the PIIGS problems. And, in the U.S., holiday sales and employment picture are showing signs of strength. I hope we are on the mend.

I hope our winter is relatively mild.

And, I wish everyone Happy Holiday Season and best wishes for the New Year.

On Wednesday, 23 June 2010, I photographed Anya in Banff National Park. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Although the end of summer officially ended a few days ago, I always consider the end of September as the end of summer. This year, our summer here in Alberta was extraordinarily cool and extraordinarily wet. As a consequence, many of us feel as though summer never really arrived.

When I lived in "Fort McMurray, I knew that once September ended, snow could fly at any time. In fact, I usually considered mid-October as the likely date for snow to fall and stay on the ground. Of course, some years we enjoyed warmer weather that lasted a few more weeks.

Here in Calgary, we typically enjoy a longer fall season, though the length of our fall season is unpredictable.

I hope everyone enjoyed the outdoors and enjoyed their summer. I further hope that before the snow flies, we still have several more beautiful days of warm weather. With some luck, I will take a few more photographs of the outdoors before winter settles in.

On Wednesday, 23 June 2010, I photographed Anya in Banff National Park. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

Refining and chemical margin recoveries are the key levers that helped Exxon Mobil Corporation (XOM) recover its earning strength. I encourage you to visit ExxonMobil's web site (see prior link), navigate to its investor section, find the second quarter earnings, and then download the document Second Quarter 2010 XOM Earnings Conference Call. This document shows in graphic form how ExxonMobil's earnings increased during second quarter 2010 versus second quarter 2009, and duringsecond quarter 2010 versus first quarter 2010.

I will quote from the company's new release for its second quarter highlights.

• Earnings excluding special items were $7,560 million, an increase of 85% or $3,470 million from the second quarter of 2009.
• Earnings per share excluding special items were $1.60, an increase of 90%.
• Earnings were up 91% from the second quarter of 2009 which included a special charge of $140 million for interest related to the Valdez punitive damages award. Earnings for the second quarter of 2010 did not include any special items.
• Capital and exploration expenditures were $6.5 billion, down 1% from the second quarter of 2009.
• Oil-equivalent production increased 8% from the second quarter of 2009. Excluding the impacts of entitlement volumes, OPEC quota effects and divestments, production was up about 10%.
• Cash flow from operations and asset sales was $9.6 billion, including asset sales of $0.5 billion.
• Share purchases to reduce shares outstanding were over $1 billion.
• Dividends per share of $0.44 increased by 5% compared to the second quarter of 2009.
• The merger with XTO Energy, a leading U.S. unconventional natural gas and oil producer, was completed on June 25, 2010, making ExxonMobil the largest U.S. natural gas producer. Through this transaction ExxonMobil has acquired a resource base in excess of 45 trillion cubic feet equivalent at a cost of under $1 per kcf equivalent.
• ExxonMobil and Synthetic Genomics Inc. (SGI) announced the opening of a greenhouse facility enabling the next step of research and testing in our algae biofuels program. SGI and ExxonMobil researchers are using the facility to test whether large-scale quantities of affordable fuel can be produced from algae.

Next, I will use Seeking Alpha's conference call transcript to provide key highlights.

In point form, ExxonMobil's Earnings Conference Call Summary

• Second quarter earnings were $7.6 billion, an increase of $3.6 billion from 2Q 2009.
  • Increase attributable to higher crude oil prices, upstream volume growth, improved downstream margins and strong chemical results.
• Earnings per share excluding special items were $1.60, up $0.76 from a year ago.
• During the second quarter of 2010, ExxonMobil distributed more than $3.4 billion to shareholders, including dividends of over $2 billion and share purchases to reduce shares outstanding of about $1.4 billion.
  • This point deserves some attention because Jim Chanos has made noise about integrated oil companies, and apparently about ExxonMobil in particular. Please see Business Insider online magazine EXCLUSIVE: Here's The Major Oil Company Jim Chanos Is Shorting.
• On June 25th, ExxonMobil completed its takeover of XTO Energy Inc.
  • Acquired a resource base of 45 trillion cubic feet (tcf) at a cost under $1 per kcf equivalent.
  • ExxonMobil is now the largest natural gas producer in the U.S.
  • Will nearly triple ExxonMobil's gas production from 1.3 billion cubic feet per day (bcfd) to 3.7 bcfd.
  • Unconventional portfolio now exceeds 8 million acres.
• Making progress in Iraq, namely furthered its plans for the West Qurna-1 field; working with South Oil Company to restore and enhance recovery from this field; establishing offices in country; and selected to lead a concept selection study for a large scale seawater supply system.
• On target with planned activities. In compliance with U.S. drilling moratorium, ExxonMobil suspended drilling offshore the U.S., including activities from its Hoover Diana platform in the Gulf of Mexico (GOM). Plans for an appraisal well at the Hadrian discovery in the GOM were also delayed. Production operations have not been affected by the moratorium and ExxonMobil does not expect significant impact to its 2010 production outlook.
• In July, ExxonMobil, Chevron, ConocoPhillips, and Shell announced plans to form a non-profit that will build and deploy a rapid response system for a potential future underwater well blowout in the deepwater GOM.
• Some operating details were provided with regard to various regions.
• In the upstream portion of the business, earnings were $5.3 billion, up $1.5 billion from 2Q 2009. After-tax earnings per barrel were $14.67. Higher crude oil prices and natural gas realizations increased earnings by $1.6 billion. Worldwide crude oil realizations were up $18 per barrel and natural gas realizations were up $0.55 per kcf from 2Q 2009.
• Oil equivalent volumes increased over 8% from 2Q 2009. Excluding the impact of entitlement effects, OPEC quotas, and divestments, production was up almost 360,000 barrels per day or nearly 10% as project ramp-ups in Qatar and Kazakhstan more than offset net field decline.
• Liquids production decreased by about 21,000 barrels per day from 2Q 2009. Excluding the impact of entitlement effects, OPEC quotas, and divestments, liquids production was up about 1% as project ramp-ups in Qatar and Kazakhstan more than offset net field decline.
• Gas volumes increased nearly 2 bcf per day or almost 25% from 2Q 2009 as a result of new project volumes in Qatar and higher demand in Europe, partly offset by field declines.
• Comparing against Q1 2010:
  • Upstream earnings decreased by about $480 million. Overall realizations decreased by $130 million, mostly due to lower natural gas realizations. Volume and mix effects reduced earnings by $450 million. There are lower natural gas demands with the change in seasons, and there were increased maintenance activities. There were other items that contributed to $100 million to earnings.
  • Liquids volumes decreased 89,000 barrels per day with increased maintenance. Natural gas production was down by 14% with increased project volumes in Qatar, decreased seasonal demand in Europe, and increased maintenance.
• Announced progress with Synthetic Genomics in their algae research.
• Discussed various initiatives and successes to reduce emissions and improve air quality.
• Downstream earnings were $1.2 billion up $710 million from 2Q 2009. Higher margins contributed $780 million. Volume and mix contributed $170 million. Other factors, mostly foreign exchange, decreased earnings by $240 million.
• Sequentially from 1Q 2010, earnings were up by $1.2 billion. Higher margins contributed $830 million. Volume and mix contributed $90 million. Other factors increased earnings by $260 million, including favorable tax and asset management activities.
• With regard to its chemical business, ExxonMobil reached a significant milestone with its integrated chemical and refining complex in Singapore with the arrival of seven worldscale furnace modules. Anticipated startup will start later in 2010 and continue into 2011.
• Chemical operating results were $1.4 billion, up $1 billion from 2Q 2009. Stronger margins contributed $840 million. Volume and mix contributed $120 million. Other effects contributed $40 million.
• Sequentially from 1Q 2010, chemical earnings increased by $120 million. Higher margins contributed $310 million and positive volume and mix contributed $80 million. Other effects decreased earnings by $270 million, largely the absence of asset management activities and unfavorable foreign exchange.
• ExxonMobil points out that, while their downstream and chemical businesses are managed separately, there are integration benefits. Together, their second quarter earnings were $2.6 billion, up $1.7 billion from 2Q 2009.
• Corporate and financing expenses were $365 million compared to $600 million in 2Q 2009. Effective tax rate in the second quarter was 43%. Cash balance was $13 billion and debt was just over $20 billion, which includes $11.4 billion of TXO debt at fair market value. ExxonMobil will look for opportunities to restructure the XTO debt obligations to reduce debt service costs and to enhance capital structure flexibility.
• Since the XTO closing, ExxonMobil has repaid $800 commercial paper and bank loans. In July, it repurchased $2.5 billion of XTO's long-term bonds. According to ExxonMobil, these actions will reduce ongoing cash interest expense with a small negative one time impact on third quarter earnings.
• In the second quarter, $3.4 billion was distribruted to shareholders in dividends and share buybacks. Share buybacks amounted to about $1.4 billion. Because of the impending XTO transaction, ExxonMobil was limited because of trading restrictions. Share purchase in the third quarter are expected to be about $3.0 billion, more than double the amount in the second quarter.
• CapEx was $6.5 billion, in line with 2Q 2009. Company is continuing to invest in robust projects.

Questions and Answers

• In response to a question that North America and Asia appear to have higher refinery throughput gains than drilling throughput increases in recent quarters, David Rosenthal of ExxonMobil commented that refinery throughput worldwide was down slightly and that there have been refinery optimizations and divestments. In other words, there is no trend.
• In response to a question about the GOM and plans for Brazil, Rosenthal indicated ExxonMobil is still planning to spud its third well in Brazil in the fourth quarter of this year. No change to those plans. Regarding GOM moratorium, there is no near-term impact. ExxonMobil was required to suspend work on its Hadrian 3 well, which is just a timing issue. Looking at the larger picture, global exploration activity remains on course. There are no real changes in terms of moving things around either from a timing perspective or geographic perspective. Rosenthal emphasized the benefit of having a diversified portfolio of projects.
• Jason Gammel of Macquarie Research Equities asked a question concerning the rig count in North American gas. Rosenthal replied that ExxonMobil is ramping up activity because it sees opportunities in its portfolio prior to the XTO merger and even more opportunities with the XTO merger. Quoting Rosenthal, "We are finding that we have a very high quality, very deep inventory of drillable prospects at our unconventional acreage position both what we have prior to the merger and then of course with the recent merger with XTO. So, it's our expectation that overall drilling activity would continue to increase. As I mentioned in our prepared remarks, it's really across the board in all of the major plays where we continue to - I mean we are only a month into this merger, but we are already well underway with activities to optimize the portfolio between the heritage ExxonMobil and XTO assets, making sure we have equipment in the right place to generate the highest returns and profitability."
• With regard to chemical profitability remaining at elevated levels, Rosenthal indicated that much depends on the economic recovery. In the Middle East and Asia Pacific, there are more facilities being brought online, but that is the nature of the chemical business--it is somewhat lumpy with infrastructure increases. He goes on to say that the company likes its position for the longer term profitability and business.
• In response to a question about capital projects throughout the world, Rosenthal indicates that everything, everywhere is going well. All are on schedule. As new facilities are brought onstream, unit profitability suffers slightly. However, in looking at the overall picture with profitability and performance, ExxonMobil is meetings its targets.
• Responding to a question for more clarity about the moratorium in the GOM, Rosenthal indicated that, while industry has taken some positive steps by creating its non-profit entity and by meeting with government officials, it remains a wait and see situation.
• Rosenthal did not provide specifics on the company's progress in Iraq. While he indicated that plans were progressing well, he would not commit to any key milestone dates.
• Commenting on the XTO merger, Rosenthal indicated that the priority for the teams is to focus on operations excellence, resource development, and optimization. Over the long term, the merger will be accretive to cash flow and add to shareholder value.
• In response to a question, Rosenthal indicated that XTO contributes about 135 million cubic feet per day (Mcfd) of natural gas.
• Since the merger announcement in December, XTO has experienced very low turnover, about one percent, which is below historical norms.
• Rosenthal sidestepped any responses that indicate how ExxonMobil might be positioning itself for changes in policy with respect to the GOM.
• In discussing future share repurchases, Rosenthal indicated that ExxonMobil examines its operating cash flows, OpEx requirements (which I am assuming means maintenance capital), funding the investment plan, paying a growing dividend, maintaining financial flexibility within a conservative capital structure, and then makes an informed decision. The company plans to spend $3 billion during this third quarter and will reevaluate next quarter. The company has no specific targets. The company presently has about $13 billion in cash.

Analysis and Discussion

Please note that you can click through graphs to see larger images.

Below is a table outlining ExxonMobil's revenue and earnings estimates.

ExxonMobil Two Year Stock Price History

ExxonMobil, ConocoPhillips, and Chevron Two Year Stock Price Comparison

I am believer that high oil prices are here to stay. While we might see the occasional dip in oil prices, they will only be dips. When I last discussed my bullish views on oil prices at Seeking Alpha, I generated a lot of controversy as shown in the comments to Don't Believe Long-Term Oil Forecasts and Don't Believe Long-Term Oil Forecasts: Part II. The reality is, if oil prices were to sink for a prolonged period, most producers could not cope and would go bankrupt. Oil producers have grown dependent upon sustained higher oil prices. And even with oil prices at these levels, oil companies are still find the market conditions challenging.

Of course, should the world experience a financial shock, prices will go down. However, I doubt price would stay down for a prolonged period.

In short, companies are trying harder than ever and going to extreme lengths to find oil at current prices while depletion continues to eat away at existing pools and consumption globally continues to rise. Therefore, higher oil prices are here to stay.

ExxonMobil had a solid quarter on all fronts. It continues to be a well managed company with a diversified portfolio of assets in a diversified portfolio of locations. As we saw, refining and chemical margins rebounded, providing ExxonMobil with strong earnings.

Above, I referenced an article with Jim Chanos, the famous hedge fund manager who tussled with Enron and helped bring it down, who appears to be short ExxonMobil. As I read the article, he implies that certain integrated oil companies have not replaced their reserves or grown their revenues in years while spending all their earnings on new capital projects. Having studied oil companies, I found that many companies believe they must produce more and book more reserves each year. And they do so, even if uneconomically. Most often uneconomically. Sometimes it is better to wait while conditions are overheated. When the investment climate changes, then make strategic investments.

If you look at ExxonMobil, it has made a host of recent large strategic investments. A few recent examples include investments in the expansions of its joint venture in Syncrude as well as its projects in Qatar, and the Kearl Oil Sands Project in Alberta. Each of these strategic multibillion dollar investments required years to build.

If you recall 2008 when the markets went into freefall, most oil companies began laying off staff, deferring projects, and hunkering down. Not ExxonMobil. It maintained its steady course. It didn't allow a short term price fluctuation alter its long term view, unlike its competitors.

And if you look at ExxonMobil it has $13 billion in cash, and I assume it continues to hold roughly $32 billion in long term investments. The company has a history of raising its dividend and buying back shares.

These observations do not fit with a company that is eating away at its seed corns. Instead, ExxonMobil continues to operate in a steadfast manner with its focus set on the long term.

Given the current outlook for continued high oil prices as evidenced by the futures curve, reasonable refining and chemical margins, a strong pipeline of new and exciting projects with good returns, I look favorably upon ExxonMobil. Then, if I consider the analysts' forecasts for 2010 and 2011 and use Friday's closing price of $59.68, I see that the 2010 p/e ratio is a little over 10 and the 2011 p/e ratio is only 8.8. In my view 8.8 is a bargain. I doubt ExxonMobil will trade below $55 in the near term future. If we allow for a potential upside of 12 times earnings multiple, then ExxonMobil could trade as high as roughly $80.

Do I expect ExxonMobil to shoot up suddenly? No, I don't. My belief is that $55 is a floor and the stock over time will move higher, especially if we begin to see the U.S. economy show positive signs of recovery during the remainder of 2010 or 2011. In summary, if you accept my values, you have $5 of potential downside and $20 of potential upside.

Disclosure:I am long ExxonMobil stock as well as long and short puts for an overall long position.

On Wednesday, 23 June 2010, I photographed Anya in Banff National Park. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.

I have been enjoying a busy summer by being outdoors between rain showers. What a weird year in terms of weather.

As you can see from the photograph, Anya and I enjoyed a day in Banff. As I recall, we arrived near noon on 23 June, and then took some photographs. We then had lunch and worked some more at various locations. And finally, we had supper and returned back to Calgary.

Unfortunately, my light meter did not function correctly. And I still have not investigated the problem. I suspect I simply need to reset the software.

Switching topics, I plan on commenting on some recent conference calls soon. The markets certainly have been entertaining and challenging.

This is just a quick post to let you know that the blog is still active and that I plan to write more soon.

On Wednesday, 23 June 2010, I photographed Anya in Banff National Park. If you click on my Flickr profile link, you will be taken to Flickr where you can see more of my pictures.