Exxon Mobil: Remain Invested for Gains

Exxon Mobil (XOM) declared its second quarter 2016 results on 29th July. It reported earnings of $ 1.7 billion (or $ 0.41 per diluted share) compared with $ 4.2 billion (or $ 1.00 per diluted share) reported for the same quarter a year ago. Earnings decreased $ 2.5 billion on weaker Upstream as well as Downstream segments results compared the same quarter last year. However, the Chemical segment delivered strong results with stronger margins and higher sales volumes offset by the absence of asset management gains.

The upstream segment earnings were $ 294 million and its production volumes were flat at 4 million oil-equivalent barrels per day.
The production volume was affected (natural gas production was down 3.6 %) by the impact of field decline and downtime events, notably in Canada and Nigeria. However, the growth in liquid production (up 1.7 %) from recent start-ups more than offset that impact.

The earnings at the downstream segment were $ 825 million. Positive earnings despite significantly lower global refining margins versus the prior year quarter were a good sign for the segment.

The strongest of the segments was the Chemical segment. This segment reported earnings of $ 1.22 billion, the highest among the three segments. This reflected continued benefits from gas and liquids cracking as well as growing product demand.

The company generated $ 5.5 billion from operations and asset sales combined. Included in this cash flow were the proceeds from asset sales totalling $ 1 billion. The company spent $ 5.2 billion on CAPEX and exploration expenses during the quarter, down 38 % from the second quarter of 2015. The company also disbursed dividends amounting to $ 3.1 billion during the quarter to its shareholders which meant $ 0.75 per share i.e. 2.7 % more compared to the year ago quarter.

Exxon is recovering with oil

Exxon Mobil is one of the few companies like ConocoPhillips who are quite comfortable operating at and above the current oil price level. Even though average oil price in the second quarter was well below $ 50 per barrel, Exxon’s results do not appear to reflect all that weakness.

It was only the well below $ 40 levels of the first quarter that could have given serious threats to Exxon had they continued to stay there for longer. Even in the third quarter, we have seen a drop in oil price from near $ 50 a barrel to near $ 40 a barrel through the month of July. But WTI is back to $ 46 or so and Brent is $ 49 or so now and they are likely to improve and pull the average for the quarter much higher.

A further improvement is expected due to the optimistic unanimity found in the comments from the IEA and the Saudis regarding a fall in production. A combination of sizeable production cuts by non-OPEC producers including US producers, and healthy demand in many parts of the globe is bound to result into crude production falling behind demand soon. Technical analysts are of the opinion that oil could set 2016 highs in four to six weeks if Brent crosses $ 50 a barrel and U.S. crude crosses $ 48. Therefore, we can be sure that the outlook for oil is positive.

In the long term, the total production capacity of the industry is also going to fall short of the ever increasing demand. This is because, the blow dealt by the prolonged down cycle has forced companies to cut production from their existing investments and also cut new capital investments in order to free up cash. As a result, it will take a considerable amount of time to create new capacity and thus supply will keep trailing demand for a long time to come. Ultimately, the price of crude oil will get better going forward.

Therefore, Exxon is going to post better and better quarterly results looking ahead from here. It is also taking steps to improve its cost profile. Further, it has some highly efficient assets on which it had timely started focusing about one or two years ago. For instance, the development costs have dropped to $ 8 per barrel in the Permian Basin and to $ 10 per barrel in the Bakken area. These are just 50 % to 60 % of the average costs generally encountered by the industry. Hence, we are going to witness wider margins even at the upstream segment of Exxon.

Conclusion

Exxon reported a mediocre result for the second quarter. Still we saw positive earnings for all the three segments with Chemical being the strongest by far. But this mediocre overall performance is looking likely to improve given the support expected from the market forces. There are enough reasons to believe that Exxon’s earnings and margins are going to grow fatter in the near as well as far future because of the focus on cost profile and the efficient wells it has. Therefore, the dive taken by this stock in late July must be seen as a handsome buying opportunity.
Published on Aug 23, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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