Is Exxon Mobil Finally a Buy?

In the past one month, shares of Exxon Mobil (XOM) have risen around 6%. In fact, its shares are now up about 13% year-to-date. This growth in its share price performance was despite sizeable ups and downs in the crude oil price and persisting oversupply issues across the world.

What’s working?

However, despite these oversupply issues, Exxon Mobil held its ground firmly. In fact, Exxon continued advancing on its self help initiatives that enabled the company to unlock significant potential concerning reducing costs, increasing efficiency, proving the reliability and capturing incremental savings across the integrated portfolio.

These initiatives are facilitating the company creating margins.

For instance, Exxon Mobil lowered unit costs by 9% and 15% for upstream and refining respectively, resulting in $1.5 billion of annual savings during 2015. In fact, its refining unit costs were lower than the industry average, as XOM leveraged the size and scale of its sites, which were 70% larger than the average industry integration.

Moreover, Exxon after having reduced its capital expenditure by $7.4 billion last year, plans to spend around $23 billion in 2016. This capital budget reflects a drop of $8 billion or 25% from the 2015 level, resulting from a continued emphasis on efficient project execution. For instance, Exxon in Baton Rouge, Louisiana is boosting sour crude oil processing capabilities by way of expanding sulfur handling capacity by 40%.

Likewise, Exxon Mobil at its refinery in Beaumont, Texas is leveraging connectivity to multiple domestic pipelines and at the same time expanding capacity to run attractive light crude oils by 20,000 barrels a day. Apart from this, XOM continues to drive improvement in the operating efficiencies, advantaged feeds, and logistics flexibility to further decrease the manufacturing costs. This growth in the operation should allow the company to grow its production of higher value products and increase its margin.

A closer look

As a result of these self-help initiatives, Exxon was able to beat Analysts’ estimate for the quarter. For instance, its earnings for the quarter came in at $0.43 per share on the revenue of $48.7 billion, beating the analyst’ estimates of $0.31 earnings per share on the revenue of $45.31 billion by a wide margin for the quarter.

Although these numbers are significantly down on a year-over-year basis, they have come to a better realization on the sequential basis, which is a positive sign for Exxon. For instance, the lower realization had led its earnings decreasing by $2.9 billion in the fourth-quarter of 2015, which is significantly higher than its earnings falling by only $1.2 billion in the first-quarter of 2016. This improvement of nearly 59% in the realization was due to its costs reduction efforts as stated above. This minimizing gap in the realization is a welcome sign for its investors, as reducing the negative realization to positive realization will improve its earnings going forward.

The most important thing to observe here is that Exxon was able to minimize the negative realization despite crude oil prices getting declined to more than $8 per barrel and natural gas falling to almost $0.75 per thousand cubic feet sequentially. Thus, Exxon remains robust with its efforts to further minimize its lower realization that should improve its earnings in the future.

As seen in the above graph, its chemical segment delivered strong commodity and specialty margin driven by the lower feed and energy costs. On account of these less feed and energy costs, the chemical segment reported earnings of $1.4 billion, up about $370 million as compared to the same quarter last year and about $392 million sequentially.

Conclusion

Thus, the oversupply issues will pressure the crude oil prices going forward, but Exxon, as seen in the first four months of the year, despite this volatility and uncertainty have delivered a return on equity of almost 15%, due to its consistent efforts of improving on the fundamental. Moreover, the company continues to improve on its costs structure and expanding capacity that will enhance its bottom line performance going forward.

Published on Jun 21, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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