I think this quarter marks an important transition for oil stocks. What everybody knows—the consensus wisdom that is baked into stock prices–has moved on. Everybody now accepts that oil prices will be low enough so that oil company earnings will look terrible in comparison to 2008. Declines in revenue and earnings next quarter aren’t going to move oil company stock prices much in October as long as they’re a result of today’s relatively low oil prices in the range of $60 to $70.

Instead the story going forward is going to be falling production. The evolving consensus seems to be that the major oil companies are going to have a tough time increasing production in the coming quarters. If that emerging consensus turns out to be right, it will push oil stocks down some more. If it’s wrong. Well, the share prices of oil companies that surprise will be off to the races. (Well, relatively. This is still a sector depressed by the drop in global demand.)

For more on why the falling production story is true in the long run see my book, The Jubak Picks. But I’m not talking long-term here. Just the next quarter or two.)

In that shorte time frame,  I think the emerging consensus stands a good chance being wrong when it comes to ExxonMobil (XOM). And that’s why I’m going to stick around in the stock, keeping it in Jubak’s Picks, albeit with a slightly lower target price.

After the really miserable earnings and revenue numbers that oil companies are posting this quarter, everybody knows the oil business is terrible. Well, actually not just terrible. It’s getting more terrible every minute.

I think you can sense this in the stories that analysts started to tell after they listened to ExxonMobil’s post-earnings report conference call on the morning of July 30.

The company had just reported really stinky (a technical Wall Street term that means “even worse than anyone expected”) earnings and revenue numbers.

Earnings per share dropped 63% from the second quarter of 2008.  Revenue dropped 46% (to a mere $74.5 billion.)

But that wasn’t the focus of a significantly large percentage of what analysts said to the financial media and in their research notes. The earnings and revenue news was already “what everyone knows.” And you don’t get a rep on Wall Street or with the financial press simply repeating what everyone knows.

Instead the story was production. The company had said that in the quarter production was flat (once you exclude declines due to OPEC production quotas and the divestiture of assets) as declines in production from existing fields offset increased production in the United States and West Africa.

Despite that CEO Rex Tillerson stuck to his projections for a 2% increase in production in 2009.

 Questioning that became the focus for analysts. How, a number of analysts asked, was the company going to get a 2% increase in production for all of 2009 after showing no growth in the second quarter?

 No way, said Macquarie Securities in an analyst note. One per cent, tops. “I have some suspicion about whether they can do this,” Barclay’s Capital told Bloomberg.

Bring on the skeptics, I say. The more doubt, the more profit for investors—if the company can pull off its target.

And there are some good reasons to believe ExxonMobil can.

First, the perverse way that the production sharing contacts that ExxonMobil signs with national oil companies and the countries that own the oil work to increase production as the price of oil falls. When oil prices were climbing that decreased the amount of oil ExxonMobil got from these contracts. With oil prices down, the company will receive more oil.

Second, unlike competitors such as Royal Dutch Shell (RDS.B), ExxonMobil isn’t cutting its spending on exploration and development.  Spending on capital projects and exploration came in at $12.2 billion for the first half of 2009. That’s essentially unchanged from the $12.5 billion spent in the first half of 2008 and, as CEO Tillerson said, is “in-line with our longer-term plans.” 

And third, the company had scheduled nine major projects to come on line in 2009 and four of those have already started production. They’ll be able to contribute more to production growth in the second half of the year as they ramp up.

Of course, even if ExxonMobil is right about production growth for 2009, the stock is still going to struggle with what everyone knows about low oil prices. As of July 30, I’m setting a new, slightly lower, target price of $87 a share, down from $91, by June 2010. (Full disclosure: I own shares of ExxonMobil in my personal portfolio.