- This second quarter could mark a bottom for Exxon Mobil with respect to earnings per share on a rolling quarter basis.
- Upstream earnings should dominate as long ss cost controls were adhered to.
- Guidance on production & cash flow remains key for dividend investors.
Exxon Mobil Corporation (NYSE:XOM) announces earnings for its second fiscal quarter this coming Friday the 29th and analysts are looking for earnings per share of $0.64 on revenues of $60.23 billion. Last quarter, the company reported $0.43 in earnings and although the company won't bring in more income than last year's corresponding quarter, Q2 will be an increase over Q1 which means a bottom may, very well, be in.
However, investors are advised to be cautious at this stage. Since there is a delay between energy companies reporting higher earnings and the spot price of crude, much of Exxon's higher earnings seem to be already priced into the stock price. In fact, with crude oil still well under 50% of its 2014 highs, Exxon Mobil is within 10% of its all-time highs which illustrates that Q2's higher earnings may be already priced in. In fact, Exxon Mobil reached $95 a share a few weeks before finally succumbing to weaker oil prices.
So here is what I will be watching out for in the Q2 earnings release. There is no doubt that the stock has been marked up because of the dividend yield it currently pays out (3.25%). In a sector where there have been many bankruptcies or where companies either froze their dividend or totally cut it, Exxon Mobil has continued to reward shareholders. Dividend income is the only reason I would invest in this stock especially with its current lofty valuation. In fact, it now has raised its dividend for the past 33 years (latest increase in May) which definitely meant something when investors started to flock to this undervalued sector over the last 18 months. Dividend investors will be watching out for the following
Upstream Earnings Should Be Strong In Q2
Firstly, with a trailing twelve-month average pay-out ratio of 93.9, investors will look for a better showing from its upstream division in Q2. Exxon's chemical business performed quite well last quarter bringing in $1.4 billion in profit but this division can't be relied on indefinitely. Why? Well, the company's downstream segment is not projected to do very well this quarter due to the rise in oil prices and refining margins remaining mute. Upstream earnings should hit it out of the park this quarter compared to previous quarters. Average crude oil prices rose to $45.41 in Q2 and production came back on stream in key projects. Dividend investors love diversification as it decreases risk. More cash flow will be generated by rising upstream earnings especially if production grew meaningfully and more cost cutting was achieved.
Production Levels rose 1.8% Last Quarter
Another principal area dividend investors will be watching with interest will be guidance on production. Exxon is projecting that its production will go from 2.54 million bpd (Barrels Per Day) to 4.0 million bpd by fiscal 2020 which should do wonders for cash flow generation. Currently, the company is running a cash flow deficit which is not sustainable. Dividends and capex payments exceeded free cash flow in Q1 but Exxon is projected to be able to balance the books at $40 crude next year which points to elevated cash flow levels ahead. Therefore, even with crude prices at $43 currently, Exxon should not be running a deficit next year. Increasing dividends require growing earnings and cash flow so investors will be looking to hear from management concerning its growth pipeline and where new production will come from in the near term.
How Will Exxon Fund InterOil And Future Acquisitions?
Furthermore, Exxon Mobil has finally started to open its purse strings by acquiring companies which show promise. InterOil is one such company due to its potential LNG reserves (where prices are linked to oil) and the proximity of its assets to the Asian market. Investing in assets such as these means elevated capex spend at the outset but when projects like these are up and running, they require very little capex spend to keep production going. The cost of the deal ended up at $2.5 billion and questions remain whether they will build brand new infrastructure or expand the existing plant on the project. This move by Exxon could be the start of a series of acquisitions in the LNG space as it is projected to grow faster than oil. Dividend investors will want to now how these upcoming acquisitions will affect the balance sheet and what are the expected returns on investment.
To sum up, Exxon Mobil definitely has momentum behind it and Q2 earnings should be much better than last quarter. Watch out for upstream earnings, production levels and cash flow numbers. If these metrics come in favorable, you can be sure that dividend investors will continue to hold their shares.