XOM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1998, for Exxon Corporation. The registrant operates globally in petroleum and natural gas exploration, production, refining, and marketing, as well as chemicals and other operations. The financial statements reflect the consolidation of General Sekiyu K.K. (GSK) retroactive to the beginning of 1997 following an increase in ownership to 50.1%.

Key Financial Metrics

Note: Total debt for Q1 1998 is calculated as the sum of current notes/loans ($2,753M) and long-term debt ($7,077M). Q1 1997 debt is derived from the text stating a $0.1 billion decrease from year-end 1997 ($9.9B).

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased by approximately 14% ($4.975 billion) primarily due to weaker crude oil prices, which averaged about $7 per barrel (33%) lower than the prior year.
• Net Income Reduction: Net income fell 13% ($285 million) to $1.89 billion. This was driven by lower upstream earnings despite improved downstream margins and higher product sales volumes.
• Upstream Performance: Exploration and production earnings dropped significantly. U.S. earnings fell from $554 million to $227 million, and Non-U.S. earnings declined from $890 million to $683 million due to lower oil and gas prices and milder weather reducing gas demand.
• Downstream Performance: Refining and marketing earnings increased 68% overall. U.S. earnings rose to $100 million, while Non-U.S. earnings increased to $496 million, benefiting from higher European refining margins and improved retail environments.
• Cash Flow: Net cash provided by operating activities decreased by $1.492 billion, influenced by lower net income and the absence of a specific insurance settlement recorded in 1997.

Outlook, Risks, and Management Commentary

• Guidance: Capital and exploration expenditures for the full year 1998 are anticipated to increase about 10% over 1997 (excluding foreign exchange fluctuations) as attractive investment opportunities are developed.
• Share Repurchases: The company purchased 14.9 million shares of common stock for the treasury at a cost of $942 million during the quarter, reducing outstanding shares to 2,446.8 million.
• Dividends: Dividends per common share were $0.410, an increase from $0.395 in the prior year.
• Key Risks and Contingencies:
  • Exxon Valdez Litigation: A $5.058 billion judgment (including $5 billion in punitive damages) remains on appeal. The corporation believes the punitive damages are unwarranted. The ultimate cost is unpredictable.
  • International Arbitration: Ongoing proceedings regarding natural gas reserves between German and Dutch affiliates in a border area. The net financial impact is not predictable but is not expected to be materially adverse.
  • Market Risks: Operations are subject to political developments, price controls, tax increases, and environmental regulations globally.

Investor Verification Checklist

• Verify the status and potential financial impact of the Exxon Valdez punitive damages appeal and the pending motion for a new trial.
• Monitor crude oil price trends and their sensitivity on upstream earnings, given the 33% price drop cited as the primary driver of income reduction.
• Confirm the execution of the 10% increase in capital expenditures for 1998 and the specific projects driving this investment.
• Review the resolution of the German-Dutch natural gas arbitration for any unexpected liability adjustments.
• Assess the sustainability of downstream margin improvements in Europe and the U.K. amidst changing global economic conditions.