Exxon Mobil: Reasons to Stay Bullish
Exxon Mobil (XOM) is in a soup this year. The stock has lost over 15% of its market capitalization in 2015 so far and trades close to its 52-week low. Additionally, Exxon posted its lowest profit in six years when it released its second-quarter results at the end of July. In fact, the company's top line was down 33% year-over-year, and it missed EPS forecasts by a wide margin.
However, I think that investors should consider using Exxon's drop in 2015 as a buying opportunity, and focus on the company's long-term prospects instead of its latest quarterly report.
Downstream and chemical businesses look attractive, while upstream will improve
Exxon Mobil is a diversified company. As a result, it can mitigate the weakness in a particular area of its business on the back of its diversification. In fact, Exxon's downstream and chemical businesses are offsetting the decline in its upstream business.
In fact, Exxon's downstream segment improved the company's overall earnings by $1.1 billion during the second quarter. The downstream business' earnings increased to $1.5 billion, up by $795 million as compared to the prior-year period. Additionally, the chemical business' earnings grew by $405 million as compared to the same quarter last year. This helped Exxon offset the huge loss in its upstream business to some extent.
The improvement in the company's downstream business was driven by an improvement in refining margins. Looking ahead, it is likely that refinery demand will remain strong on the back of robust crude oil demand. For instance, earlier in August, capacity utilization at U.S. refineries was 96% as they processed 17.1 million barrels a day, up 313,000 barrels as compared to the preceding week.
Now, oil demand in the U.S. has remained strong this year, and the trend is slated to continue due to the improving usage of diesel, jet fuel, and gasoline. This will lead to stronger refinery demand going forward, which will act as a catalyst for Exxon's downstream business. Moreover, on a global scale as well, the refining business should do well, primarily driven by China. According to a recent Bloomberg report:
"China's crude imports rose to a record on a monthly basis, driven by buying from small private refineries, according to preliminary data from the Beijing-based General Administration of Customs on Saturday.
Chinese imports last month jumped almost 30 percent to the highest monthly level on record on demand from filling strategic petroleum reserves. China is the world's second-biggest oil consuming country after the U.S."
Looking ahead, I think that oil demand in China will remain strong in the long run as the country produces less oil than it needs. There is a wide gap between oil consumption and production in China, and the gap is expected to widen going forward. This means that China will continue importing and refining more oil in order to meet its needs. Now, Exxon Mobil has both upstream and downstream businesses in China, which means that the company will see strong refining demand in the region.
Also, an improvement in demand in China could lead to better oil prices, as the increase in Chinese imports helped oil prices recover from five-month lows on Monday. As a result, increasing imports from China might have a positive impact on Exxon's upstream business as well, which has been under pressure due to weakness in average realized prices.
Low costs will support the upstream business and cash flow
Exxon Mobil is focusing on the deployment of proprietary technologies to improve efficiency and productivity. Exxon has been able to achieve cost savings of around 30% so far this year in onshore U.S.
Also, Exxon Mobil has the lowest cost profile among its peers in U.S. shale plays. This is the reason why the company has a strong cash flow profile and was added to Goldman Sachs' (GS) "conviction buy" last month.
Goldman Sachs analyst Neil Mehta is of the opinion that Exxon is well-positioned to outperform its peers and the broader energy sector. He calls Exxon a "rare dividend/FCF growth story among big oils." According to Mehta, Exxon's free cash flow is expected to grow from $9 billion in 2015 to $19 billion in 2017, driven by improving production volumes and decreasing capital expenditure. Additionally, Exxon can improve its dividend by 6% annually until 2017, which compares favorably to 0% and 1% dividend growth for peers such as ConocoPhillips (COP) and Chevron (CVX), respectively.
There's no doubt that Exxon Mobil's financial performance has taken a hit of late due to the prevailing oil scenario. This has led to a drop in the company's stock price as well. However, Exxon's size and diversity makes it a good investment despite adverse oil pricing. The company will benefit from increasing refining demand in the U.S. and China, while increasing imports into China will act as another catalyst. Thus, in my opinion, investors should definitely consider buying the drop in Exxon Mobil shares as they present a good opportunity for the long run.