Exxon Mobil (NYSE:XOM) may have posted its worst earnings in 12 years but the company still handily beat analysts expectations reporting net income of $4.24 billion or $1.01 a share. Revenues came in at $67.34 billion which again were $6 billion+ ahead of expectations. Q3 earnings definitely illustrated the obvious robustness of the company's integrated business model. Profits from the company's downstream division (refineries) rose to over $2 billion as a result of the steep fall in oil prices since June of last year. These badly needed downstream profits offsetted the company's drilling activities where almost $5 million a day was lost during the quarter in its US oil and gas wells alone. After Q3 earnings, does Exxon provide a sound investment for investors going forward? I believe so especially when you consider that the price of crude oil plummeted to under $40 a barrel in the third quarter. Its downstream and chemical business really picked up the mantle in Q3. I had predicted that refining profits would not have been this strong due to lower crack spreads but they really outperformed. Therefore considering where the price of oil is at the moment and the obvious benefits of Exxon's integrated model, I believe this company is a good risk/reward play right here. Q3 earnings highlighted some interesting points that back up my assumption. Let's discuss.

Firstly the company is definitely on a growth path (production-wise) as this can be clearly seen when comparing the similar revenues this year of Q1 ($67.6 billion) to Q3 ($67.34 billion).The average price of crude was higher in the first 3 months of this year compared to July, August and September (see chart) but that didn't deter the company posting similar revenues this quarter.

Ever since this downturn started, this company has been relentless in cutting its operating costs. Whereas other companies in this field have had to cut cap-ex and their staff meaningfully, Exxon has been able to use its sheer size to lower costs from service providers. If you look at Exxon presently (as an oil field service company), it would make sense to lower costs to the company because of the financial muscle it has. Every company is hurting in this sector at the moment but most do not have the balance sheet of Exxon. Service companies know that Exxon will probably use this downturn to increase its acreage over time. They want this business so they will sacrifice present margin levels for future volume. For example, the company grew its position in the Permian basin in the third quarter by 48,000 acres but I expect more acreage and acquisitions from Exxon before long. Service companies also know this, which is why they will play ball with the oil major in the short term. (Exxon has saved $7 billion already this year in operating costs).

On top of decreasing costs, the company is increasing production and is predicted to increase this metric to 4.1 million barrels of oil equivalent per day by year end. Why is this significant for investors? Well most oil companies (especially upstream) have had to cut capex meaningfully this year which may not hurt their production levels in the short term but definitely will in the long term. Exxon on the other hand is expected to increase its production this year and even more in the forthcoming years due to not cutting cap-ex or jobs like its competitors. The company is basically betting that its balance sheet , its downstream division and overall stronger margins can sustain the business (in the short term) until oil prices rise once more. It's a calculated risk on the company's part, but one which will pay handsome dividends if it comes off. The company is sticking to its plan as liquids production increased by 3.6% to 2.33 million barrels per day which should again increase margins over time. Exxon has much to gain from keeping cap-ex levels elevated in that it will increase valuable market share over time if oil prices rise once more.

Good For Further Dividends And Buybacks

Finally when you crunch the numbers, it is evident that this company can still fulfill its obligations to shareholders by returning cash through share buybacks and dividend pay-outs. $3.6 billion was paid out to shareholders in the quarter ($500 million of which went to share buybacks) illustrating that net income levels ($4.2 billion) is still adequate to fulfill obligations assuming the company's cash balance doesn't decrease meaningfully. Take a look at the chart below to show where funds were deployed in the third quarter (Cash balance decreased by $100 million).

Debt stood at $34.3 billion ($500 million higher that Q2's number) at the end of the quarter and although it is rising, I wouldn't read too much into it especially when you consider the company assets ($348 billion) are still more than twice the value of its liabilities. The main metric income investors should look out for is its cash flow metric which stood at $9.7 billion in Q3 (from operations and asset sales - $300 million higher than the Q2 number.) Furthermore free cash flow levels from operations should increase more in the forthcoming years (as cap-ex bit by bit starts to wind down)which should mean the company should not have any problem in continuing to return capital to shareholders through increasing dividends and share buybacks. Therefore using this stock to ride out the current downturn is a good choice in my opinion especially for income investors.

Exxon Mobil Earnings - Summary

To sum up, Q3 illustrated that this company is continuing to grow its production whilst at the same time reduce its operating costs . It has the balance sheet to negotiate hard with service companies so cutting capex and jobs may never take place at a large rate at Exxon. Furthermore its earnings last quarter covered all dividends and there was only a $200 million net hike in its debt relative to its cash flow. This company can cut if it needs to but up to now, its focus is firmly on the future and higher oil prices. You can also some other posts with a bullish view on Exxon, and a bearish view on Exxon stock.