Exxon Mobil Corp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In early 2020, the balance of supply and demand for petroleum and petrochemical products experienced two significant disruptive effects. On the demand side, the COVID-19 pandemic spread rapidly through most areas of the world resulting in substantial reductions in consumer and business activity and significantly reduced demand for crude oil, natural gas, and petroleum products. This reduction in demand coincided with announcements of increased production in certain key oil-producing countries which led to increases in inventory levels and sharp declines in prices for crude oil, natural gas, and petroleum products. Demand for petroleum and petrochemical products has continued to recover through 2021 with each of the Corporation's sequential quarterly financial results benefiting from stronger prices and margins versus the previous quarter. The rate and pace of recovery, however, has varied across geographies and business lines, with Downstream margins remaining low compared to historical levels over the last decade. The Corporation continues to closely monitor industry and economic conditions amid the uneven global recovery from the COVID-19 pandemic. Looking beyond the volatility marking recent economic conditions, the Corporation’s annual planning process provides an opportunity to re-affirm the fundamentals of supply and demand that underpin our businesses. Consideration is given to a diverse set of risks and other factors that may influence future energy supply and demand trends, including technological advancements, regulation and government policies, climate change, greenhouse gas restrictions, and other general economic conditions. The Corporation views climate change risks as a global issue that requires collaboration among governments, private companies, consumers and other stakeholders to create meaningful solutions. These should meet the world’s increasing demand for affordable and reliable energy while creating opportunities to transition to a lower-carbon emissions future. The variety of potential transition pathways for society to a lower-carbon emissions future, influenced by assumptions regarding economic growth, technology and governmental policy, indicates a wide range of uncertainty for the types and demand levels of energy. The Board of Directors evaluates climate change risk in the context of overall enterprise risk, including other operational, strategic, and financial risks. The Corporation considers the interactions among these factors as it pursues a strategy that is resilient to a wide range of potential pathways for society’s energy transition while continuing to grow shareholder value. It takes into account emerging industry and economic conditions and market and government policy uncertainties in developing its strategic plans and longer-term price views as part of its annual business planning process. The Corporation continues to make progress on its greenhouse gas emission reduction plans and efforts to position the company for success in a lower-carbon emissions future. It expects to play an important role in providing petroleum and petrochemical products that are critical to economic growth while minimizing environmental impacts and delivering solutions to achieve a lower-carbon emissions future. The company continues to analyze internal and external scenarios of future energy markets to create a deeper understanding of what resiliency requires and which opportunities could emerge, but the assumptions and outcome of any given scenario or set of scenarios come with a high degree of uncertainty. The Corporation tests assets or groups of assets for recoverability on an ongoing basis whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. To the extent the annual planning process described above, including review by the Board of Directors in the fourth quarter, results in any significant changes to the Corporation’s current development plans for its portfolio, certain assets could be at risk for impairment. The Corporation will complete any required asset recoverability assessments in connection with the preparation and review of the Corporation’s year-end financial statements for inclusion in its 2021 Form 10-K. Until these activities are complete, it is not practicable to reasonably estimate the existence or range of potential future impairments. 19 FUNCTIONAL EARNINGS SUMMARY Third Quarter First Nine Months Earnings (Loss) (U.S. GAAP) 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Upstream United States 869 (681) 1,895 (2,582) Non-U.S. 3,082 298 7,795 1,084 Downstream United States 663 (136) 401 (338) Non-U.S. 592 (95) 237 472 Chemical United States 1,183 357 3,180 816 Non-U.S. 957 304 2,695 456 Corporate and financing (596) (727) (2,033) (2,278) Net income (loss) attributable to ExxonMobil (U.S. GAAP) 6,750 (680) 14,170 (2,370) Earnings (loss) per common share (dollars) 1.57 (0.15) 3.31 (0.55) Earnings (loss) per common share - assuming dilution (dollars) 1.57 (0.15) 3.31 (0.55) References in this discussion to Corporate earnings (loss) mean net income (loss) attributable to ExxonMobil (U.S. GAAP) from the consolidated income statement. Unless otherwise indicated, references to earnings (loss), Upstream, Downstream, Chemical and Corporate and financing segment earnings (loss), and earnings (loss) per share are ExxonMobil's share after excluding amounts attributable to noncontrolling interests. REVIEW OF THIRD QUARTER 2021 RESULTS ExxonMobil’s third quarter 2021 earnings were $6.8 billion, or $1.57 per diluted share, compared with a loss of $0.7 billion a year earlier. The increase in earnings was driven by higher Upstream realizations and volumes; higher Chemical and Downstream margins; and lower expenses. Earnings for the first nine months of 2021 were $14.2 billion, or $3.31 per diluted share, compared with a loss of $2.4 billion a year earlier. Capital and exploration expenditures were $10.8 billion, down $5.8 billion from 2020. Oil-equivalent production was 3.7 million barrels per day, down 3 percent from the prior year. Excluding entitlement effects, divestments, and government mandates, oil-equivalent production was up 2 percent from the prior year. The Corporation distributed $11.2 billion in dividends to shareholders. 20 Third Quarter First Nine Months 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Upstream results United States 869 (681) 1,895 (2,582) Non-U.S. 3,082 298 7,795 1,084 Total 3,951 (383) 9,690 (1,498) Upstream earnings were $3,951 million in the third quarter of 2021, compared with a loss of $383 million in the third quarter of 2020. • Realizations increased earnings by $3,720 million, driven by higher liquids realizations of $3,120 million and higher gas realizations of $600 million. • Volume and mix effects increased earnings by $140 million due to higher liquids sales of $100 million and favorable gas sales mix of $40 million. • All other items increased earnings by $470 million, driven by lower expenses of $280 million, favorable other earnings impacts of $180 million, and the absence of prior year quarter unfavorable non-operational impacts of $10 million. • U.S. Upstream earnings were $869 million, up $1,550 million from the prior year quarter. • Non-U.S. Upstream earnings were $3,082 million, up $2,784 million from the prior year quarter. • On an oil-equivalent basis, production was essentially flat from the third quarter of 2020. • Liquids production totaled 2.3 million barrels per day, up 27,000 barrels per day, reflecting the impacts of less downtime, growth and higher demand, partly offset by lower entitlements. • Natural gas production was 8.1 billion cubic feet per day, down 206 million cubic feet per day, as less downtime and growth were more than offset by lower entitlements, the Groningen production limit, and divestments. Upstream earnings were $9,690 million in the first nine months of 2021, compared with a loss of $1,498 million in the first nine months of 2020. • Realizations increased earnings by $9,350 million, with higher liquids realizations of $8,580 million and higher gas realizations of $770 million. • Volume and mix effects reduced earnings by $210 million, reflecting lower liquids sales volumes of $290 million partly offset by favorable gas sales mix of $80 million. • All other items increased earnings by $2,050 million, driven by lower expenses of $1,270 million, the absence of prior year unfavorable non-operational impacts of $420 million, and other favorable earnings impacts of $360 million. • U.S. Upstream earnings were $1,895 million, compared with a loss of $2,582 million in the prior year. • Non-U.S. Upstream earnings were $7,795 million, up $6,711 million from the prior year. • On an oil-equivalent basis, production decreased 3 percent from the first nine months of 2020. • Liquids production totaled 2.3 million barrels per day, down 100,000 barrels per day, with higher demand and project growth more than offset by impacts from lower entitlements, increased government mandates, decline and divestments. • Natural gas production was 8.5 billion cubic feet per day, down 44 million cubic feet per day, as higher demand was offset by lower entitlements, the Groningen production limit, and divestments. 21 Third Quarter First Nine Months Upstream additional information (thousands of barrels daily) (thousands of barrels daily) Volumes reconciliation (Oil-equivalent production) (1) 2020 3,672 3,785 Entitlements - Net Interest 3 (1) Entitlements - Price / Spend / Other (158) (118) Government Mandates 10 (38) Divestments (27) (22) Growth / Other 165 71 2021 3,665 3,677 (1) Natural gas is converted to an oil-equivalent basis at six million cubic feet per one thousand barrels. Listed below are descriptions of ExxonMobil’s volumes reconciliation factors which are provided to facilitate understanding of the terms. Entitlements - Net Interest are changes to ExxonMobil’s share of production volumes caused by non-operational changes to volume-determining factors. These factors consist of net interest changes specified in Production Sharing Contracts (PSCs) which typically occur when cumulative investment returns or production volumes achieve defined thresholds, changes in equity upon achieving pay-out in partner investment carry situations, equity redeterminations as specified in venture agreements, or as a result of the termination or expiry of a concession. Once a net interest change has occurred, it typically will not be reversed by subsequent events, such as lower crude oil prices. Entitlements - Price, Spend and Other are changes to ExxonMobil’s share of production volumes resulting from temporary changes to non-operational volume-determining factors. These factors include changes in oil and gas prices or spending levels from one period to another. According to the terms of contractual arrangements or government royalty regimes, price or spending variability can increase or decrease royalty burdens and/or volumes attributable to ExxonMobil. For example, at higher prices, fewer barrels are required for ExxonMobil to recover its costs. These effects generally vary from period to period with field spending patterns or market prices for oil and natural gas. Such factors can also include other temporary changes in net interest as dictated by specific provisions in production agreements. Government Mandates are changes to ExxonMobil's sustainable production levels due to temporary non-operational production limits imposed by governments, generally upon a sector, type or method of production. Divestments are reductions in ExxonMobil’s production arising from commercial arrangements to fully or partially reduce equity in a field or asset in exchange for financial or other economic consideration. Growth and Other factors comprise all other operational and non-operational factors not covered by the above definitions that may affect volumes attributable to ExxonMobil. Such factors include, but are not limited to, production enhancements from project and work program activities, acquisitions including additions from asset exchanges, downtime, market demand, natural field decline, and any fiscal or commercial terms that do not affect entitlements. 22 Third Quarter First Nine Months 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Downstream results United States 663 (136) 401 (338) Non-U.S. 592 (95) 237 472 Total 1,255 (231) 638 134 Downstream earnings were $1,255 million in the third quarter of 2021, up $1,486 million from the third quarter of 2020. • Margins increased earnings by $1,250 million, reflecting stronger industry refining conditions. • Volume and mix effects decreased earnings by $10 million. • All other items increased earnings by $250 million, reflecting other favorable earnings impacts of $190 million and lower expenses of $70 million, partly offset by the absence of prior year quarter favorable non-operational impacts of $10 million. • U.S. Downstream earnings were $663 million, compared with a loss of $136 million in the prior year quarter. • Non-U.S. Downstream earnings were $592 million, up $687 million from the prior year quarter. • Petroleum product sales of 5.3 million barrels per day were 304,000 barrels per day higher than the prior year quarter. Downstream earnings were $638 million in the first nine months of 2021, up $504 million from the first nine months of 2020. • Margins decreased earnings by $50 million, driven by lower realized fuels margins. • Volume and mix effects decreased earnings by $30 million. • All other items increased earnings by $580 million, as lower expenses of $430 million and the absence of prior year unfavorable non-operational impacts of $340 million were partly offset by unfavorable other earnings impacts of $190 million. • U.S. Downstream earnings were $401 million, compared with a loss of $338 million in the prior year. • Non-U.S. Downstream results were $237 million, down $235 million from the prior year. • Petroleum product sales of 5.1 million barrels per day were 168,000 barrels per day higher than the prior year. 23 Third Quarter First Nine Months 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Chemical results United States 1,183 357 3,180 816 Non-U.S. 957 304 2,695 456 Total 2,140 661 5,875 1,272 Chemical earnings were $2,140 million in the third quarter of 2021, up $1,479 million from the third quarter of 2020. • Higher margins increased earnings by $1,640 million. • All other items decreased earnings by $160 million, mainly due to the absence of prior year favorable non-operational impacts of $120 million and increased expenses of $50 million. • U.S. Chemical earnings were $1,183 million, up $826 million from the prior year quarter. • Non-U.S. Chemical earnings were $957 million, up $653 million from the prior year quarter. • Third quarter prime product sales of 6.7 million metric tons were 48,000 metric tons higher than the prior year quarter. Chemical earnings were $5,875 million in the first nine months of 2021, up $4,603 million from the first nine months of 2020. • Higher margins increased earnings by $3,890 million. • Volume and mix effects increased earnings by $260 million. • All other items increased earnings by $450 million, driven by lower expenses of $190 million, the absence of prior year unfavorable non-operational impacts of $90 million and other favorable earnings impacts of $170 million. • U.S. Chemical earnings were $3,180 million, up $2,364 million from the prior year. • Non-U.S. Chemical earnings were $2,695 million, up $2,239 million from the prior year. • First nine months prime product sales of 19.6 million metric tons were 825,000 metric tons higher than the prior year. Third Quarter First Nine Months 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Corporate and financing results (596) (727) (2,033) (2,278) Corporate and financing expenses were $596 million for the third quarter of 2021, down $131 million from the third quarter of 2020, reflecting lower corporate costs, partly offset by net unfavorable tax impacts. Corporate and financing expenses were $2,033 million for the first nine months of 2021, down $245 million from 2020, reflecting lower financing costs. 24 LIQUIDITY AND CAPITAL RESOURCES Third Quarter First Nine Months 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Net cash provided by/(used in) Operating activities 31,005 10,663 Investing activities (8,125) (15,157) Financing activities (22,464) 10,568 Effect of exchange rate changes (12) (331) Increase/(decrease) in cash and cash equivalents 404 5,743 Cash and cash equivalents (at end of period) 4,768 8,832 Cash flow from operations and asset sales Net cash provided by operating activities (U.S. GAAP) 12,091 4,389 31,005 10,663 Proceeds associated with sales of subsidiaries, property, plant & equipment, and sales and returns of investments 18 100 575 229 Cash flow from operations and asset sales 12,109 4,489 31,580 10,892 Because of the ongoing nature of our asset management and divestment program, we believe it is useful for investors to consider proceeds associated with asset sales together with cash provided by operating activities when evaluating cash available for investment in the business and financing activities, including shareholder distributions. Cash flow from operations and asset sales in the third quarter of 2021 was $12.1 billion, an increase of $7.6 billion from the comparable 2020 period primarily reflecting higher earnings. Cash provided by operating activities totaled $31.0 billion for the first nine months of 2021, $20.3 billion higher than 2020. Net income including noncontrolling interests was $14.5 billion, an increase of $17.2 billion from the prior year period. The adjustments for the noncash provision of $14.9 billion for depreciation and depletion was down $0.8 billion from 2020. Changes in operational working capital were a contribution of $2.2 billion, compared to a reduction of $1.5 billion in the prior year period. All other items net decreased cash flows by $0.7 billion in 2021 versus a reduction of $0.9 billion in 2020. See the Condensed Consolidated Statement of Cash Flows for additional details. Investing activities for the first nine months of 2021 used net cash of $8.1 billion, a decrease of $7.0 billion compared to the prior year. Spending for additions to property, plant and equipment of $8.0 billion was $5.7 billion lower than 2020. Proceeds from asset sales of $0.6 billion were $0.3 billion higher than the prior year. Net investments and advances decreased $1.0 billion to $0.7 billion. Net cash used by financing activities was $22.5 billion in the first nine months of 2021, including $10.8 billion of debt repayments. This compares to net cash provided by financing activities of $10.6 billion in the prior year, reflecting long-term debt issuances in the first nine months of 2020. Total debt at the end of the third quarter of 2021 was $56.6 billion compared to $67.6 billion at year-end 2020. The Corporation's debt to total capital ratio was 25.3 percent at the end of the third quarter of 2021 compared to 29.2 percent at year-end 2020. The Corporation's capital allocation priorities continue to be investing in advantaged projects, strengthening the balance sheet and paying a reliable dividend. The Corporation has access to significant capacity of long-term and short-term liquidity. Commercial paper continues to provide short-term liquidity, and is reflected in "Notes and loans payable" on the Consolidated Balance Sheet. Cash and cash equivalents was $4.8 billion at the end of the third quarter of 2021. The Corporation had undrawn short-term committed lines of credit of $10.6 billion and undrawn long-term committed lines of credit of $0.6 billion as of third quarter 2021. The Corporation distributed a total of $11.2 billion to shareholders in the first nine months of 2021 through dividends. The Corporation, as part of its ongoing asset management program, continues to evaluate its mix of assets for potential upgrade. Because of the ongoing nature of this program, dispositions will continue to be made from time to time which will result in either gains or losses. Additionally, the Corporation continues to evaluate opportunities to enhance its business portfolio through acquisitions of assets or companies, and enters into such transactions from time to time. Key criteria for evaluating acquisitions include potential for future growth and attractive current valuations. Acquisitions may be made with cash, shares of the Corporation’s common stock, or both. 25 The termination of certain transportation service agreements in the first quarter reduced commitments previously reported at year-end in Form 10-K under “Take-or-pay and unconditional purchase obligations” by approximately $2.3 billion. The majority of those commitments related to the years 2026 and beyond. Litigation and other contingencies are discussed in Note 3 to the unaudited condensed consolidated financial statements. TAXES Third Quarter First Nine Months 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Income taxes 2,664 337 4,986 378 Effective income tax rate 33 % -198 % 32 % -56 % Total other taxes and duties (1) 8,572 7,901 24,296 21,081 Total 11,236 8,238 29,282 21,459 (1) Includes “Other taxes and duties” plus taxes that are included in “Production and manufacturing expenses” and “Selli ng, general and administrative expenses.” Total taxes were $11.2 billion for the third quarter of 2021, an increase of $3.0 billion from 2020. Income tax expense was $2.7 billion compared to $0.3 billion in the prior year reflecting higher commodity prices. The effective income tax rate of 33 percent compared to -198 percent in the prior year period primarily due to a change in mix of results in jurisdictions with varying tax rates. Total other taxes and duties increased by $0.7 billion to $8.6 billion. Total taxes were $29.3 billion for the first nine months of 2021, an increase of $7.8 billion from 2020. Income tax expense increased by $4.6 billion to $5.0 billion reflecting higher commodity prices. The effective income tax rate of 32 percent compared to -56 percent in the prior year period primarily due to a change in mix of results in jurisdictions with varying tax rates. Total other taxes and duties increased by $3.2 billion to $24.3 billion. In the United States, the Corporation has various ongoing U.S. federal income tax positions at issue with the Internal Revenue Service (IRS) for tax years beginning in 2006. The Corporation filed a refund suit for tax years 2006-2009 in U.S. federal district court (District Court) with respect to the positions at issue for those years. On February 24, 2020, the Corporation received an adverse ruling on this suit. The IRS has asserted penalties associated with several of those positions. The Corporation has not recognized the penalties as an expense because the Corporation does not expect the penalties to be sustained under applicable law. On January 13, 2021, the District Court ruled that no penalties apply to the Corporation's positions in this suit. The Corporation filed a notice of appeal regarding the substantive issues to the Fifth Circuit Court of Appeals on April 9, 2021. The government filed a notice of appeal regarding the penalty issue to the same court on April 19, 2021. The Corporation filed its opening brief regarding the substantive issues on July 21, 2021. Proceedings in the Fifth Circuit Court of Appeals are continuing. Unfavorable resolution of all positions at issue with the IRS would not have a material adverse effect on the Corporation’s operations or financial condition. RESTRUCTURING ACTIVITIES During 2020, ExxonMobil conducted an extensive global review of staffing levels and subsequently commenced targeted workforce reductions within a number of countries to improve efficiency and reduce costs. The programs, which are expected to be substantially complete by the end of 2021, include both voluntary and involuntary employee separations and reductions in contractors. In the nine months of 2021, the Corporation recorded after-tax charges of $48 million, consisting primarily of employee separation costs, from workforce reduction programs in Europe and Singapore associated with the global review of staffing levels. The cash outflows in the nine months of 2021 associated with these activities were $321 million. The Corporation does not expect any further significant charges related to the previously disclosed workforce reduction programs. Total charges for 2021 will be approximately $50 million with cash outflows ranging between $350 million and $450 million. This does not include charges related to employee reductions associated with any portfolio changes or other projects. Before-tax workforce reduction savings, including employees and contractors, are estimated to range between $1 billion and $2 billion per year after program completion when compared to 2019 levels. 26 CAPITAL AND EXPLORATION EXPENDITURES Third Quarter First Nine Months 2021 2020 2021 2020 (millions of dollars) (millions of dollars) Upstream (including exploration expenses) 2,839 2,794 8,013 11,497 Downstream 466 772 1,391 3,059 Chemical 545 564 1,381 2,041 Other 1 3 2 6 Total 3,851 4,133 10,787 16,603 Capital and exploration expenditures in the third quarter of 2021 were $3.9 billion, down 7 percent from the third quarter of 2020. Capita l a nd exploration expenditures in the first nine months of 2021 were $10.8 billion, down 35 percent from the first nine months of 2020. The Corporation expects 2021 capital spending to be near the low end of the guidance range of $16 billion to $19 billion. Actual spending could vary depending on the progress of individual projects and property acquisitions. FORWARD-LOOKING STATEMENTS Statements related to outlooks, projections, goals, targets, descriptions of strategic, operating, and financial plans and objectives, and other statements of future events or conditions are forward-looking statements. Actual future results, including financial and operating performance; total capital expenditures and mix, including allocations of capital to low carbon solutions; cost reductions and efficiency gains, including the ability to meet or exceed announced cost and expense reduction objectives; plans to reduce future emissions and emissions intensity; timing and outcome of projects to capture and store CO2; timing and outcome of biofuel and plastic waste recycling projects; cash flow, dividends and shareholder returns, including the timing and amounts of share repurchases; future debt levels and credit ratings; business and project plans, timing, costs, capacities, and returns; and resource recoveries and production rates could differ materially due to a number of factors. These include global or regional changes in the supply and demand for oil, natural gas, petrochemicals, and feedstocks and other market conditions that impact prices and differentials for our products; actions of competitors and commercial counterparties; the outcome of commercial negotiations, including final agreed terms and conditions; the ability to access short- and long-term debt markets on a timely and affordable basis; the ultimate impacts of COVID-19, including the extent and nature of further outbreaks and the effects of government responses on people and economies; reservoir performance; the outcome of exploration projects; timely completion of development and other construction projects; final management approval of future projects and any changes in the scope, terms, or costs of such projects as approved; final approval of company plans and strategies, including capital allocation, and changes in such plans and strategies as approved; changes in law, taxes, or regulation including environmental regulations, trade sanctions, and timely granting of governmental permits and certifications; government policies and support and market demand for low carbon technologies; war, and other political or security disturbances; opportunities for potential investments or divestments and satisfaction of applicable conditions to closing, including regulatory approvals; the capture of efficiencies within and between business lines and the ability to maintain near-term cost reductions as ongoing efficiencies; unforeseen technical or operating difficulties and unplanned maintenance; the development and competitiveness of alternative energy and emission reduction technologies; the results of research programs and the ability to bring new technologies to commercial scale on a cost-competitive basis; and other factors discussed in this report and under Item 1A. Risk Factors of ExxonMobil’s 2020 Form 10-K. We assume no duty to update these statements as of any future date. The term “project” as used in this report can refer to a variety of different activities and does not necessarily have the same meaning as in any government payment transparency reports. 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the nine months ended September 30, 2021, does not differ materially from that discussed under Item 7A of the registrant's Annual Report on Form 10-K for 2020.