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When Exxon Mobil (XOM) reports Q3 results in late October, its earnings will show that a sharp decline in oil prices and weaker refining margins weighed on its bottom-line as sluggish consumer spending trends and a mixed landscape in the industrial and construction markets slowed global energy markets. After the close yesterday, XOM disclosed certain factors that will impact its Q3 profits, including an estimated hit of $600 mln to $1.0 bln in its upstream business due to softer oil prices, and another $600 mln to $1.0 bln haircut resulting from significantly lower industry refining margins, which continue to normalize from the historically high levels seen a year ago.

• A change in timing effects and in scheduled maintenance, particularly in the refining business, will partly offset these headwinds. Furthermore, analysts are still expecting XOM's EPS to edge modestly higher on a yr/yr basis in Q3 as it continues to pump out record amounts of crude oil.
• Fueled by a 15% increase in net production for the upstream business, the company generated its second highest Q2 earnings of the past decade. After closing on its blockbuster acquisition of Pioneer Natural Resources on May 3, 2024, XOM achieved record quarterly production for its Permian Basin assets. This robust production activity drove a $1.5 bln increase in upstream earnings, excluding tax-related items, on a year-to-date basis as of June 30, 2024.
• While oil refining margins weakened in Q3, XOM is projecting a modest bump of approximately $100 in refining margins for both chemical products and specialty products. Lower feed and energy costs are providing a benefit here, mitigating a subdued demand environment.

Overall, XOM's Q3 update indicates that the company faced a more challenging business climate as crude oil prices fell by 17% during the quarter, but we believe that the market is largely looking past yesterday's disclosures. Instead, the focal point is currently resting on the conflict between Israel and Iran and the impact that its having on oil prices. Since September 26, crude oil has rallied by about 10% and prices could move much higher if Israel follows through on a threat to attack Iran's oil infrastructure.