Oil giant Exxon Mobil (XOM Free Exxon Stock Report) has reported second-quarter earnings per share of $0.73, down from the year-earlier tally of $0.92 and below our estimate of $1.00. The good news is that performance improved from an especially weak first quarter, driven by a 7% jump in combined oil and natural gas production and improved crude oil prices.

The sharp rise in pumping volume is what investors for years have been looking for at Exxon. The company had long experienced flat or slightly declining production as it sold assets and weathered age-related declines at its older fields. That situation appears to have changed with a major focus on drilling in the Permian Basin of Texas. Exxon has beefed up its presence in the region significantly in recent years through acquisitions. It may be unlikely that the company can boost quarterly production by 7% indefinitely, but a moderate, low- to mid-single-digit upturn in annual production is probably within reach.

The investment community is still not totally pleased, though. The profitability of domestic wells is not as great as it is internationally, owing to higher drilling costs. There is also a lingering concern that Exxon and other major shale drillers will pump too much and keep the oil market oversupplied, limiting price realizations. An OPEC-Russia based coalition of oil-producing nations is currently supporting the market by withholding supplies.

Still, Exxon is doing what it can to boost earnings and generate value for its shareholders. Of further promise on the oil-pumping side is the development of a major discovery offshore of Guyana. The company is going against the grain in terms of current industry thinking by increasing spending sizably to bring along new projects. But the payoff could prove worthwhile, assuming steadily rising global energy demand.

Downstream, fuel margins in the latest quarter remained below average, but improved from an especially weak first quarter. Profits from the downstream segment were down 38% year over year, but recovered from a rare loss in the January-to-March period. Exxon Mobil's strategy here is more about raising efficiency than broad-based expansion. In chemicals manufacturing, earnings fell sharply on lower margins and increased downtime, due to higher maintenance activity. There are favorable prospects for expansion in chemicals, though, given the low cost of feedstocks, such as natural gas.

Overall, this was a down quarter for Exxon Mobil, but with the silver lining being rising production and the promise of improved results in the field ahead. The company has the financial strength to maintain its ambitious drilling program in the Permian Basin, whereas smaller operators may not. The top-quality stock offers a high dividend yield and has appeal as a core energy holding.

About The Company:Exxon Mobil Corp. is the largest publicly traded oil company in the world. It also owns 69.6% of Imperial Oil (Canada). Daily production in 2018 was as follows: crude oil, 2.3 million barrels (flat vs. ’17); natural gas, 9.4 billion cubic feet (-4% vs. ’17). Reserves as of 12/31/18 were 21.2 billion barrels of oil equivalent (57% oil and 43% gas).

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.