- Exxon Mobil Earnings Q3 2015 are expected to be reported on October 30th, before market opens.
- Crude oil prices are substantially down in Q3. Upstream profits will be lower and downstream margins will also suffer due to lower crack spreads this quarter.
- Dividend investors will be mindful of cash flow levels and the dividend pay-out ratio. This stock is a dividend aristocrat and attracts a lot of income investors for this reason.
- The company's strategy of keeping production elevated is a calculated risk that will work out if the oil price can get in gear. Market share can be gained from here.
Exxon Mobil (NYSE:XOM) announces earnings on the 30th of October before the bell and it will be interesting to see if analysts get it right with their bearish assumptions. Analysts are expecting an EPS of $0.9 on revenues of $63.88 billion which are well below reported numbers for the last quarter. Well, on the whole I agree with analysts' sentiment because when you look at the price of crude over the third quarter ( July, August, September), its apparent that the average price was substantially lower than the previous quarter (see chart)
Exxon is a highly integrated company meaning it has a huge downstream division which acts as a hedge in itself. Other oil majors such as Chevron (NYSE:CVX) who are not as integrated (have smaller downstream divisions compared to their upstream activities) will possibly be under even more pressure when they report their earnings. August and September of this year had crude trading close to $40 a barrel whereas in May and June, crude was up at $60 a barrel. The downturn in the price of oil since June of last year definitely confused many analysts when predicting earnings for oil majors and we saw this with Exxon as the company beat EPS expectations for the first 3 consecutive quarters of the downturn before finally succumbing in Q2 of this year. The company's downstream division is going to be key. How profitable can it be?
Even though crude oil prices are still up 15%+ since their sub $40 a barrel lows a few months ago, the same rise has not been seen at the pumps. Why? Well gasoline futures are still on the floor (March 2009 levels) and regular gasoline is still selling at February levels. The gasoline crack spread which is essentially the difference between the cost of crude oil compared with the cost of gasoline and diesel fell sharply in Q3 of this year compared to Q2 which means that Exxon's downstream division definitely will have its earnings affected in this quarter. The present prices of gasoline and diesel and the corresponding low crack spread are telling us that demand is weak which is something Exxon doesn't need at the moment in the face of falling upstream revenues. EPS would be the metric that will probably be hit here due to the company's lower than usual downstream earnings. Watch for refining updates in earnings to see where the company sees itself going forward. If the price of oil is to remain under $50 a barrel, Exxon needs a thriving downstream division. The company's beaumount refinery in Texas for example increased production capacity recently to 345,000 barrels per day but Exxon's southern Californian refinery's sale will be completed by next year which will mean the company will lose 155,000 barrels per day. Forward looking commentary will be of keen interest here.
Income investors will primarily be tuning in for an update on the company's free cash flow. Free cash flow has been rising since the start of the year as downstream earnings and exploration cuts have mainly offset lower realized revenues. This stock is a dividend aristocrat and income investors usually flock to this stock because of its general yield (3.61%) but also because of its dividend growth rate which is 13.4% over the last 3 years - one of the highest in this sector. The company's current dividend pay-out ratio is 73% which is worrying especially considering the trend in place (see chart)
Investors shouldn't overlook the importance of this metric as increasing the dividend meaningfully is difficult when the pay-out ratio is so high. Free cash flow levels will be watched closely here by dividend investors that are always looking ahead for possible dividend freezes or cuts. $0.73 per share will undoubtedly be paid out again in December (as a dividend hike is not due until next year) but it will be the trend that dividend investors will be focused on. I just think the weakness in oil this quarter plus the weakness in the current crack spread could put an end to the company's rising free cash flow levels this year thus far.
The final piece of the jigsaw for shareholders will be production levels. Exxon met expectations last quarter for production and it is really the only company in this sector that has sacrificed short term gain by keeping production levels elevated. It has done this by not laying off big numbers of its workforce or by implementing serious cutbacks. It's a calculated risk on the company's part but one that will pay off handsomely if oil prices rise from here. Why? Well its competitors will not be at full capacity whereas Exxon will be when oil prices rise again meaningfully, which should mean the company should gain some valuable market share. Being able to keep going at full steam while resisting cutting back definitely illustrates the company's financial muscle. Forward looking commentary here will be vital, especially in the event of an oil price collapse from here.
To sum up, Q3 will be a very interesting quarter for Exxon Mobil. Analysts are bearish and rightly so, but astute investors will watch for production guidance, free cash flow levels and downstream margins. Going full steam ahead has worked well for this company in the past. Its taking a calculated risk which if it works out will separate it even more from its competitors in terms of market share.