Exxon Mobil (NYSE:XOM) managed to beat the earnings expectations for the first quarter of 2017 and total profits more than doubled from last year. The company also exhibited one of its biggest strengths, as well as a weaknesses, in the quarterly results.

In the first quarter of 2017, Exxon Mobil’s profits rose 122% to $4.01 billion, or $0.95 per share. Analysts polled by FactSet had been expecting $0.88 per share. Revenue for the period climbed 30% to $63.29 billion. The surge in profits was driven in large part by the improvement in commodity prices which completely offset the negative impact of 4% drop in total production to 4.2 million barrels of oil equivalents per day. The earnings beat, however, was probably driven by a better performance of the downstream, or refining and marketing, division.

In the first quarter of 2016, when oil prices were at their lowest level since 2003, Exxon Mobil’s upstream, or exploration and production division, posted a loss of $76 million. But since then, oil prices have risen 55.8% while the price of natural gas is also up 58.9%. That pushed the company’s upstream business to a profit of $2.25 billion for the first quarter of 2017. Moreover, the company’s downstream segment, which struggled due to weak refining and marketing margins in the fourth quarter of 2016, made a comeback in the first quarter of 2017 by posting a 23.2% increase in earnings to $1.12 billion, thanks to operational efficiency. This offset the impact of 13.6% decline in profits from the chemicals business to $1.17 billion.

With the surge in profits, Exxon Mobil has set a positive tone for other major oil and gas producers, such as Royal Dutch Shell (RDS.A, RDS.B), BP Plc (NYSE:BP), ConocoPhillips (NYSE:COP) and Occidental Petroleum (NYSE:OXY), who will release earnings in the coming days. These and other energy companies look well positioned to post their best quarterly results in years. In terms of cash flows, however, it is unlikely that they will be as good as Exxon Mobil.

One of Exxon Mobil’s biggest strength, perhaps the biggest strength, is its ability to generate strong levels of cash flows. And this was evident in the latest quarterly results.

In the first three months of 2017, the company generated $8.2 billion of cash flow from operations, which was enough to cover the capital and exploration expenditure of $4.17 billion and dividends of $3.1 billion, leading to a cash flow surplus of around $900 million. Note that Exxon Mobil will release a full cash flow statement in the coming days which will have the GAAP figure related to capital expenditure which will likely be lower than what the company reports in the earnings release. This means that the cash flow surplus, based on data from the company’s SEC filing, will likely be even bigger.

As per data from the company’s previous SEC filings, Exxon Mobil is the only oil major which generated enough funds to fully cover its capital expenditure throughout the downturn. It has reported free cash flows in the last two years. Although it has failed to self-fund all of its dividends from the free cash flows, the latest results indicate that it might be able to do that in 2017. The improvement in oil and gas prices could allow the company to self-fund its operations and investor payouts with internally generated cash flows.

On the other hand, the first quarter results also highlight Exxon Mobil’s poor production growth profile. As mentioned earlier, the company’s production dropped by 4% to 4.2 million boe per day. Even after excluding the impact of entitlements and asset sales, total output was still down 1% on an adjusted basis.

The company has ramped up capital expenditure by almost 16% to $22 billion for 2017 and is investing heavily in shale projects in the US, mainly in the Permian Basin and the Bakken formation. Exxon Mobil has said that its production from these high-return, short-cycle projects could climb by an average of 20% per year over the long-run.

In addition to this, Exxon Mobil is also working on a number of long-cycle, conventional oil as well as LNG projects which will come online in the near term. These include the Tengiz oil project in Kazakhstan, the development of Liza oil field in offshore Guyana, the LNG project in Papua New Guinea and the startup of Hebron oil project in offshore Canada. These startups may offset the negative impact of field declines and asset sales, but they might not move the needle for a company as large as Exxon Mobil.

In fact, as per Exxon Mobil’s own forecast, it is targeting production of 4 million to 4.4 million boe per day through 2020 in a $40 to $100 a barrel oil (Brent) price environment. At best, this will translate into a modest growth for a company that has been producing around 4.1 million to 4.2 million boe per day since 2012. In an environment of rising oil prices, Wall Street usually rewards companies that come with a strong production growth profile. In this backdrop, Exxon Mobil could underperform.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own shares of funds that may hold a long position in Exxon Mobil, Royal Dutch Shell and ConocoPhillips.

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