- Earnings were taken badly by the market because of the size of the miss. However, earnings are always difficult to predict in this sector.
- Production was down due to problems in some countries but next quarter should better.
- The dividend is not at risk. Exxon needs better refining margins and higher crude oil prices to post better earnings in forthcoming quarters.
Exxon Mobil (NYSE:XOM) announced earnings before the bell on Friday (the 29th) and missed earnings per share projections by a sizable distance which resulted in a selloff once markets opened. Analysts were looking for $0.61 per share in earnings but Exxon only managed to deliver an adjusted $0.41 in earnings. Furthermore, revenues came in at $57.7 billion which was a 22% drop over Q2 last year and $2.53 billion under expectations.
Upstream, for me, didn't deliver as expected, only bringing in $294 million from the $1.7 billion earnings take. Analysts were hoping that the second quarter would mark the bottom of Exxon's earnings slump but it wasn't to be. The $1.7 billion net income figure came in $100 million shy of last quarter number which means Exxon's downward earnings spiral hasn't come to an end yet.
Crude oil prices averaged over $46 a barrel in the second quarter and it was expected that this in turn would lead to much higher upstream earnings, but we didn't get the boost we were expecting. Production levels also took a dive as the company only managed to do 3.96 million BOE/D which was a nice bit shy of the 4.1 million expected. I wrote in my preview that the oil major should be able to break even on cash flow (with crude at $40) by the end of 2017. However, despite cutting its capex in Q2 this year by 38%, it is evident that the company needs higher prices to earn meaningful cash flow from its projects. However, the earnings report had some pockets of strength for long term and income investors and emphasized the advantages of Exxon's integrated model.
Exxon Stock Is Big Time Oversold
Now before you get anxious (assuming you are a long term investor in Exxon or thinking of being one soon), the chart above illustrates that Exxon has now reached meaningful oversold territory. The 5 day RSI indicator has reached 5.38 so we should have a bounce any day now. In fact, Exxon's down-move for sub $95 levels has corresponded with crude oil's steep decline over the past few weeks. Sentiment in Exxon Mobil is at its lowest point this year and I would be amazed if we didn't get an aggressive bounce in the share price shortly.
Source : Sentimentrader.com
Production Got Hit In Q2 Due To Problems In Canada & Nigeria
Secondly, the bears are already stating that Exxon's production number may be a sign of things to come in forthcoming quarters, but I'm not buying it. The reasoning here is that big oil companies must keep drilling aggressively to grow production as well as replace reserves that are being lost each year. This argument may have had merit up to 5 or 6 years ago but the fracking boom that took place in the US forever changed the way oil can be extracted from shale and basically eliminated the peak oil argument in the process.
What investors should be aware of is that the company is continuing to invest right through the cycle. Yes, production was down this quarter but much of this was due to Canadian wildfires stopping production and sabotage problems in Nigeria. However, these problems are temporary and we only have to look at Exxon's recent InterOil acquisition and its land purchases in a prolific area of the Permian basin in recent quarters to see that higher production numbers are coming.
Exxon Mobil Will Be The Last Company Standing In This Sector
After listening to the earnings conference call, the inherent worry among dividend investors is that if cash flow and earnings don't improve meaningfully shortly, then the dividend may come under pressure in the future. Refining margins were very poor in the second quarter which lead to earnings falling to $825 million in the second quarter.
Exxon's downstream division had served a nice buffer against negative upstream earnings in recent quarters but the huge increase in inventories has lead to softer earnings at present. The chemical division is still acting as a source of strength, bringing in $1.2 billion in earnings in Q2. However the fact of the matter is that after 2 quarters of 2016, Exxon has only pulled in $3.5 billion in earnings, but has paid out $6.2 billion in dividends to shareholders.
Furthermore, capex spend for the first six months was $10.3 billion which was 36% lower than the first half of 2015. Therefore Exxon is bridging its cash flow gap by selling off assets, which is unsustainable in the long run. An increase in debt on the balance sheet will undoubtedly occur but with a debt to equity ratio of 0.17, I don't see this becoming an issue especially when you compare Exxon's balance sheet to its peers. It really comes down to oil prices needing to be higher and with crude still trading way below its 200 weekly average of $74 (see chart), I only see one direction for Exxon Mobil stock and that is most certainly up.
To sum up, Exxon Mobil second quarter earnings miss was a result of weak commodity prices and weaker refining margins. If these conditions continue, there may be more carnage in this sector as both refiners and producers will find it difficult to post positive earnings. Therefore I still see investors pouring money into Exxon as it is integrated, has the best balance sheet and will continue to raise its dividend. Watch oil prices. When they make a firm bottom, that will be the time to go long Exxon Mobil.