Exxon Mobil Corp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations During the COVID-19 pandemic, industry investment to maintain and increase production capacity was restrained to preserve capital, resulting in underinvestment and supply tightness as demand for petroleum and petrochemical products recovered. Across late 2021 and early 2022, this dynamic, along with supply chain constraints, and a continuation of demand recovery led to a steady increase in oil and natural gas prices. In the first quarter of 2022, tightness in the oil and natural gas markets was further exacerbated by Russia’s invasion of Ukraine and subsequent sanctions imposed upon business and other activities in Russia. The price of Brent crude oil and certain regional natural gas indicators increased to levels not seen for several years. Additionally, by the end of the first quarter, refining margins improved to levels above the 10-year range, and the tight supply and demand balance is expected to persist. In early March, in response to Russia’s military action in Ukraine, the Corporation announced that it plans to discontinue operations on the Sakhalin-1 project (“Sakhalin”) and develop steps to exit the venture. The Corporation remains focused on protecting the safety of employees, operations, and the environment. The Corporation is complying with all applicable laws and sanctions and is currently engaged in transitioning Sakhalin-1 operating activities to another party. The Corporation’s first quarter results include after-tax charges of $3.4 billion largely representing the impairment of its operations related to Sakhalin (see Note 2 to Condensed Consolidated Financial Statements). Efforts to transition operatorship to a third party and exit the venture is expected to result in limited hydrocarbon sales and cash flows for the Corporation’s account during the second quarter of 2022, and none following that period. For reference, excluding the impact of impairments and other charges, after-tax earnings related to the Corporation’s interest in Sakhalin in the first quarter were approximately $0.2 billion, and combined oil and gas production was approximately 65 thousand oil-equivalent barrels per day. The Corporation's exit from the project would result in quantities estimated at 150 million oil-equivalent barrels no longer qualifying as proved reserves, which represented less than one percent of the Corporation's 18.5 billion oil-equivalent barrels of proved reserves at year-end 2021. FUNCTIONAL EARNINGS SUMMARY Earnings (loss) excluding Identified Items, are earnings (loss) excluding individually significant non-operational events with an absolute corporate total earnings impact of at least $250 million in a given quarter. The earnings (loss) impact of an Identified Item for an individual segment in a given quarter may be less than $250 million when the item impacts several segments or several periods. Management uses these figures to improve comparability of the underlying business across multiple periods by isolating and removing significant non-operational events from business results. The Corporation believes this view provides investors increased transparency into business results and trends, and provides investors with a view of the business as seen through the eyes of management. Earnings (loss) excluding Identified Items is not meant to be viewed in isolation or as a substitute for net income (loss) attributable to ExxonMobil as prepared in accordance with U.S. GAAP. Three Months Ended March 31, 2022 Upstream Downstream Chemical Corporate and Financing Total U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. (millions of dollars) Earnings (loss) (U.S. GAAP) 2,376 2,112 685 (353) 819 535 (694) 5,480 Identified Items Impairments — (2,877) — — — — (98) (2,975) Other - Russia impacts — (378) — — — — — (378) Earnings (loss) excluding Identified Items 2,376 5,367 685 (353) 819 535 (596) 8,833 Three Months Ended March 31, 2021 Upstream Downstream Chemical Corporate and Financing Total U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. (millions of dollars) Earnings (loss) (U.S. GAAP) 363 2,191 (113) (277) 715 700 (849) 2,730 Identified Items Severance charges — — — — — — (31) (31) Earnings (loss) excluding Identified Items 363 2,191 (113) (277) 715 700 (818) 2,761 References in this discussion to Corporate earnings (loss) mean net income (loss) attributable to ExxonMobil (U.S. GAAP) from the Consolidated Statement of Income. Unless otherwise indicated, references to earnings (loss), Upstream, Downstream, 16 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 FIRST QUARTER 2022 RESULTS ExxonMobil’s first quarter 2022 earnings were $5.5 billion, or $1.28 per diluted share, compared with earnings of $2.7 billion a year earlier. The increase in earnings was driven by higher Upstream realizations and Downstream margins partly offset by charges related to the company's Russia Sakhalin-1 operation. 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 down 2 percent from the prior year. The Corporation distributed $3.8 billion in dividends to shareholders and bought back $2.1 billion of common stock. UPSTREAM Upstream Financial Results Three Months Ended March 31, 2022 2021 Earnings (loss) (U.S. GAAP) (millions of dollars) United States 2,376 363 Non-U.S. 2,112 2,191 Total 4,488 2,554 Identified Items (1) United States — — Non-U.S. (3,255) — Total (3,255) — Earnings (loss) excluding Identified Items (1) United States 2,376 363 Non-U.S. 5,367 2,191 Total 7,743 2,554 Upstream Earnings Factor Analysis (millions of dollars) Price – Higher realizations increased earnings by $5,930 million as average realizations for crude oil increased 68%, while natural gas realizations increased 137%. Volume – Unfavorable volume and mix effects decreased earnings by $810 million reflecting impacts from the reduced Groningen production limit, higher downtime including the effects of weather, and lower entitlements due to prices, partly offset by growth in the Permian Basin and Guyana. Other – All other items increased earnings by $70 million. Identified Items (1) – 1Q 2022 $(3,255) million loss as a result of the company's decision to discontinue operations at the Russia Sakhalin-1 project. (1) Refer to Functional Earnings Summary for definition of Identified Items and earnings (loss) excluding Identified Items. 17 Upstream Operational Results Three Months Ended March 31, 2022 2021 Production of crude oil, natural gas liquids, bitumen and synthetic oil Net production (thousands of barrels daily) United States 753 665 Canada/Other Americas 474 575 Europe 4 35 Africa 257 253 Asia 738 691 Australia/Oceania 40 39 Worldwide 2,266 2,258 Natural gas production available for sale Net production (millions of cubic feet daily) United States 2,777 2,767 Canada/Other Americas 182 216 Europe 770 1,403 Africa 58 24 Asia 3,340 3,599 Australia/Oceania 1,325 1,164 Worldwide 8,452 9,173 (thousands of oil-equivalent barrels daily) Oil-equivalent production (1) 3,675 3,787 (1) Natural gas is converted to an oil-equivalent basis at six million cubic feet per one thousand barrels. 1Q 2022 versus 1Q 2021 Liquids production – 2.3 million barrels per day increased 8 thousand barrels per day from 2021, reflecting easing government mandated curtailments, growth in the Permian Basin and Guyana, partly offset by higher downtime including the effects of weather, lower entitlements due to higher prices, and divestment impacts. Natural gas production available for sale – 8.5 billion cubic feet per day decreased 721 million cubic feet per day from 2021, reflecting impacts from the reduced Groningen production limit, divestments, and entitlements. 18 Upstream Additional Information Three Months Ended March 31 (thousands of barrels daily) Volumes reconciliation (Oil-equivalent production) (1) 2021 3,787 Entitlements - Net Interest (30) Entitlements - Price / Spend / Other (44) Government Mandates 113 Divestments (62) Other (89) 2022 3,675 (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. Other 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. 19 DOWNSTREAM Downstream Financial Results Three Months Ended March 31, 2022 2021 Earnings (loss) (U.S. GAAP) (millions of dollars) United States 685 (113) Non-U.S. (353) (277) Total 332 (390) Earnings (loss) excluding Identified Items (1) United States 685 (113) Non-U.S. (353) (277) Total 332 (390) (1) Refer to Functional Earnings Summary for definition of Identified Items and earnings (loss) excluding Identified Items. Downstream Earnings Factor Analysis (millions of dollars) Margins – Higher margins increased earnings by $310 million. Improved refining margins were partially offset by unfavorable unsettled derivative impacts. Volume – Favorable volume and mix effects increased earnings by $180 million, primarily due to the absence of prior year reliability impacts from winter storm Uri. Other – All other items increased earnings by $230 million, driven by the absence of terminal conversion impacts in the prior year quarter. 20 Downstream Operational Results Three Months Ended March 31, 2022 2021 Refinery throughput (thousands of barrels daily) United States 1,685 1,532 Canada 399 364 Europe 1,193 1,153 Asia Pacific 537 545 Other 169 157 Worldwide 3,983 3,751 Petroleum product sales (1) United States 2,256 2,077 Canada 442 409 Europe 1,345 1,272 Asia Pacific 644 665 Other 471 458 Worldwide 5,158 4,881 Gasoline, naphthas 2,114 1,996 Heating oils, kerosene, diesel oils 1,722 1,692 Aviation fuels 289 183 Heavy fuels 249 257 Specialty petroleum products 784 753 Worldwide 5,158 4,881 (1) Data reported net of purchases/sales contracts with the same counterparty. CHEMICAL Chemical Financial Results Three Months Ended March 31, 2022 2021 Earnings (loss) (U.S. GAAP) (millions of dollars) United States 819 715 Non-U.S. 535 700 Total 1,354 1,415 Earnings (loss) excluding Identified Items (2) United States 819 715 Non-U.S. 535 700 Total 1,354 1,415 (2) Refer to Functional Earnings Summary for definition of Identified Items and earnings (loss) excluding Identified Items. 21 Chemical Earnings Factor Analysis (millions of dollars) Margins – Lower margins decreased earnings by $20 million. Volume – Favorable volume and mix effects increased earnings by $70 million, primarily due to higher U.S. sales. Other – All other items decreased earnings by $110 million, primarily driven by increased project and planned maintenance spend. Chemical Operational Results Three Months Ended March 31, 2022 2021 Chemical prime product sales (1) (thousands of metric tons) United States 2,704 2,190 Non-U.S. 4,033 4,256 Worldwide 6,737 6,446 (1) Data reported net of purchases/sales contracts with the same counterparty. CORPORATE AND FINANCING Corporate and Financing Financial Results Three Months Ended March 31, 2022 2021 (millions of dollars) Earnings (loss) (U.S. GAAP) (694) (849) Identified Items (1) (98) (31) Earnings (loss) excluding Identified Items (1) (596) (818) Corporate and Financing expenses were $694 million for the first quarter of 2022, down $155 million from the first quarter of 2021, reflecting lower pension-related corporate costs and the absence of prior year severance charges, partly offset by Russia Sakhalin impacts. (1) Refer to Functional Earnings Summary for definition of Identified Items and earnings (loss) excluding Identified Items. 22 LIQUIDITY AND CAPITAL RESOURCES Three Months Ended March 31, 2022 2021 (millions of dollars) Net cash provided by/(used in) Operating activities 14,788 9,264 Investing activities (3,945) (2,355) Financing activities (6,713) (7,785) Effect of exchange rate changes 142 27 Increase/(decrease) in cash and cash equivalents 4,272 (849) Cash and cash equivalents (at end of period) 11,074 3,515 Cash flow from operations and asset sales Net cash provided by operating activities (U.S. GAAP) 14,788 9,264 Proceeds associated with sales of subsidiaries, property, plant & equipment, and sales and returns of investments 293 307 Cash flow from operations and asset sales 15,081 9,571 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 first quarter of 2022 was $15.1 billion, an increase of $5.5 billion from the comparable 2021 period primarily reflecting higher earnings. Cash provided by operating activities totaled $14.8 billion for the first three months of 2022, $5.5 billion higher than 2021. Net income including noncontrolling interests was $5.8 billion, an increase of $3.0 billion from the prior year period. The adjustment for the noncash provision of $8.9 billion for depreciation and depletion was up $3.9 billion from 2021. Changes in operational working capital were a contribution of $1.1 billion, compared to a contribution of $2.0 billion in the prior year period. All other items net decreased cash flows by $0.9 billion in 2022 versus a reduction of $0.5 billion in 2021. See the Condensed Consolidated Statement of Cash Flows for additional details. Investing activities for the first three months of 2022 used net cash of $3.9 billion, an increase of $1.6 billion compared to the prior year. Spending for additions to property, plant and equipment of $3.9 billion was $1.5 billion higher than 2021. Proceeds from asset sales of $0.3 billion were essentially flat with the prior year. Net investments and advances increased $0.1 billion to $0.3 billion. Net cash used in financing activities was $6.7 billion in the first three months of 2022, including $2.1 billion for the purchase of 26.2 million shares of ExxonMobil stock, as the Corporation initiated its previously announced buyback program in the quarter. This compares to net cash used in financing activities of $7.8 billion in the prior year, reflecting long-term debt repayments of $4.1 billion during the first three months of 2021. On April 29, 2022, the company announced that it is increasing its share repurchase program from up to $10 billion to a total of up to $30 billion through 2023. The stock repurchase program does not obligate the company to acquire any particular amount of common stock, and it may be discontinued or resumed at any time. The timing and amount of shares actually repurchased in the future will depend on market, business, and other factors. Total debt at the end of the first quarter of 2022 was $47.5 billion compared to $47.7 billion at year-end 2021. The Corporation's debt to total capital ratio was 21.2 percent at the end of the first quarter of 2022 compared to 21.4 percent at year-end 2021. The net debt to capital ratio was 17.1 percent at the end of the first quarter, a decrease of 1.8 percentage points from year-end 2021. 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. In addition to cash balances, 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 $11.1 billion at the end of the first quarter of 2022. The Corporation had undrawn short-term committed lines of credit of $10.7 billion and undrawn long-term committed lines of credit of $0.6 billion as of first quarter 2022. The Corporation distributed a total of $3.8 billion to shareholders in the first three months of 2022 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 23 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. Litigation and other contingencies are discussed in Note 3 to the unaudited condensed consolidated financial statements. TAXES Three Months Ended March 31, 2022 2021 (millions of dollars) Income taxes 2,806 796 Effective income tax rate 40 % 33 % Total other taxes and duties (1) 8,449 7,283 Total 11,255 8,079 (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 $11.3 billion for the first quarter of 2022, an increase of $3.2 billion from 2021. Income tax expense was $2.8 billion compared to $0.8 billion in the prior year reflecting higher commodity prices. The effective income tax rate of 40 percent compared to 33 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 $1.2 billion to $8.4 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 and the government have appealed the District Court's rulings to the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit). Proceedings in the Fifth Circuit are continuing. On March 4, 2022, the Corporation also filed a refund suit for tax years 2010-2011 in District Court with respect to the positions at issue for those years. The Corporation has not recognized asserted penalties for 2010-2011 as an expense because the Corporation does not expect the penalties to be sustained under applicable law. 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. 24 CAPITAL AND EXPLORATION EXPENDITURES Three Months Ended March 31, 2022 2021 (millions of dollars) Upstream (including exploration expenses) 3,879 2,357 Downstream 577 470 Chemical 448 306 Other — — Total 4,904 3,133 Capital and exploration expenditures in the first quarter of 2022 were $4.9 billion, up 57 percent from the first quarter of 2021. The Corporation plans to invest in the range of $21 billion to $24 billion in 2022. Actual spending could vary depending on the progress of individual projects and property acquisitions. FORWARD-LOOKING STATEMENTS Statements related to outlooks; projections; descriptions of strategic, operating, and financial plans and objectives; statements of future ambitions and plans; 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; 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; variable impacts of trading activities on our margins and results each quarter; actions of competitors and commercial counterparties; the outcome of commercial negotiations, including final agreed terms and conditions; the ability to access debt markets; 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, including variability and timing factors applicable to unconventional resources; 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; 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 under Item 1A. Risk Factors of ExxonMobil’s 2021 Form 10-K. 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. 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the three months ended March 31, 2022, does not differ materially from that discussed under Item 7A of the registrant's Annual Report on Form 10-K for 2021.