- Oil prices have continued to fall sharply reaching a 12-year low on January 20.
- Exxon Mobil stock has held up well in this oil price fall.
- However, oil prices will eventually recover and now is the time to load up on Exxon Mobil Stock.
Exxon Mobil (NYSE:XOM), the world's largest publicly traded oil and gas company, has been less negatively affected by the crash in oil prices than other energy stocks. While crude oil prices have fallen about 67% since July 01, 2014, and natural gas and gasoline have dropped about 57%, Exxon Mobil stock has declined only 20.1%, as shown in the table below.
While Exxon Mobil's upstream revenues and earnings have significantly declined due to falling oil prices, the company's downstream operations have done pretty well, taking advantage of better crack spreads, which explains the lower drop in Exxon Mobil stock price compared to the decline in prices of energy commodities.
Exxon Mobil Upstream Earnings Could Decline
The average WTI crude oil price in the fourth quarter of 2015 was at $44.57 a barrel while the average Brent crude oil price was at $46.30. Nevertheless, Exxon's upstream operations were able to show earnings of $857 million in the quarter, which were much lower than in the previous quarters, as shown in the chart below. Non-U.S. operations contributed earnings of $1,395 million while U.S. upstream operations showed a loss of $538 million. For the current quarter, upstream results might come in much worse since oil prices have fallen further. Thus far in the current quarter, the average WTI crude price is at $31.46 a barrel, 29.4% lower than in the prior quarter, and the average Brent crude price is at $33.04 a barrel, 28.6% lower than in the previous quarter. Hence, it is pretty much possible that Exxon Mobil's upstream operations will show a loss in Q1 2016.
Exxon Downstream Earnings Could Rise
Exxon's downstream operations have benefited from higher crack spreads and lower natural gas price. The segment earnings of $6,557 million in 2015 were 115.3% higher than the earnings in 2014. For the current quarter, it is possible that Exxon's downstream operations will show higher earnings since the average RBOB Gasoline Crack Spread, thus far, is at $13.22 a barrel or 12.9% greater than the spread in the previous quarter. Also, the average natural gas price for the current quarter, at $2.16 per Million Btu, is 11.8% lower than in the prior quarter. Refiners use natural gas as an energy source for the process - cheap natural gas helps to lower production cost.
Exxon Mobil Chemical Earnings Could Continue Growth
Exxon's chemical operations earnings for 2015 came in at $4,418 million, good for 2.4% YoY growth. Chemical earnings are expected to show similar results in 2016 since lower raw material costs compensate for lower product prices.
All in all, despite the extremely low oil prices, Exxon will continue to show profits, as downstream and chemical earnings and cost reduction will be much higher than the possible upstream losses in case oil prices continue to remain so low.
Oil prices have continued to fall sharply reaching a 12-year low on January 20, and it is not clear if the 20.8% rise in Brent crude oil and 8.4% increase in WTI crude oil, since then, indicates a bottom. Nevertheless, oil price will eventually recover sooner or later. As no one has anticipated crude oil plunging 70% in a year and a half, it is impossible at this moment to determine when oil prices will start to climb. However, commodities prices are moving in cycles, and lower capital expenditures on exploration and production will eventually cause oil prices to rebound. Investors in Exxon Mobil stock can expect a significant price appreciation when oil prices do recover.
Exxon Mobil Stock Sports A Sustainable Dividend Yield
While waiting for a recovery in oil prices, investors in Exxon Mobil stock are receiving a pretty high sustainable dividend currently yielding 3.60%. Moreover, Exxon's annual rate of dividend growth over the past three years was high at 13.4%, was 10.2% over the past five years, and over the last ten years also was high at 9.8%. Exxon has increased its annual dividend payment to shareholders for 33 consecutive years. Even during the global economic crisis during the years 2008-2009, Exxon Mobil continued to increase its dividend.
Exxon's results reflect its relentless focus on costs. In 2015, the company achieved about $11.5 billion in capital and cash operating cost reductions. Moreover, Exxon's guidance for 2016 capital expenditure is $23.2 billion, a 25% reduction from 2015 and a 40% reduction from 2014; the largest percentage reduction among the super-majors. In contrast to many oil and gas companies, Exxon was able to generate positive free cash flow in 2015. Solid operating performance combined with continued investment and cost discipline generated cash flow from operations and asset sales of $32.7 billion and free cash flow of $6.5 billion.
Looking beyond the current weakness in energy prices, and considering its strong balance sheet, Exxon might take advantage of the situation by making acquisitions at the bottom of the cycle. According to the company, there is a tremendous amount of interest in acquisitions. However, they remain very patient and keep alert to the value propositions.
Exxon Mobil stock has generally been a top performer among energy stocks in low oil price environment, and has outperformed in the current bear market. Also, the stock could remain a top defensive performer, as the company is the only major with the ability to balance its cash cycle when Brent crude is below $45 a barrel. Since the beginning of the year Exxon Mobil stock is up 4.2% while the S&P 500 Index has decreased 7.3%, and the Nasdaq Composite Index has lost 11.4%.
To summarize, considering Exxon Mobil's strong balance sheet, its highly profitable downstream and chemical operations, and the company's focus on creating shareholder value through the cycle, Exxon Mobil stock is an attractive long-term investment. While waiting for a significant rebound in the price of oil, investors can enjoy the generous dividend yielding 3.60% a year. The company has a long record of 33 years of consecutive dividend hikes. Even during the global economic crisis of the years 2008-2009, Exxon continued to increase its dividend, which makes it a pretty safe dividend play.