Petroleum industry giant Exxon Mobil (XOM – Free Exxon Stock Report) has reported somewhat disappointing fourth-quarter 2017 earnings per share, and the shares fell notably on the news. After stripping out asset impairment charges and a gain related to U.S. tax reform, the company turned in profits of $3.7 billion, or $0.88 a share. That was down 2% from the prior-year quarter, before impairments. Our estimate was for $0.94 a share. For the full year, the picture was brighter, as the oil-price recovery pushed into a higher gear. Exxon's adjusted annual 2017 profits jumped more than 50%, to $15.3 billion.
The general thinking had been that the pickup in oil quotations would prove an elixir for profits. That proved to be the case for Exxon's oil and gas production segment, but weakness in the international refining & marketing division and notably higher corporate and financing expenses held back profits. Still, the broader trend looks to be positive in the new year, and we have raised our estimate for 2018 earnings per share by 10%, to $4.50. Higher average oil prices and an improved business climate owing to domestic tax reform underpin our assumptions.
In terms of combined oil and gas production, there was some minor slippage both for the quarter (down 3%) and the year (down 2%). But results may not be uninspiring much longer. Exxon is putting the pedal to the metal with respect to its drilling initiatives in the Permian Basin, a region that overlaps West Texas and New Mexico. The company plans to triple its production in the Permian, to 600,000 barrels a day, in the next five years, spending $50 billion in the process.
There is some risk to pursuing such an aggressive domestic drilling agenda. The agreement by OPEC and other major global oil producers is set to terminate by yearend. There is no guarantee that it will be extended, and oil prices could fall back if all parties concerned were to pump flat out. Basically, the industry does not want to see oil prices follow the pattern of natural gas quotations, which remain much lower than their peak, as new ample shale supplies have been located. The opening up of abundant shale resources has led to more impairment charges, once rare at Exxon, as older fields can no longer compete.
The unexciting quarterly results aside, Exxon Mobil shares retain their interest for conservative, income-minded investors looking for a long-term position in the energy sector.
About The Company:Exxon Mobil Corp. is the largest publicly traded oil company in the world. It also owns 69.6% of Imperial Oil (Canada). Daily production in 2016 was as follows: crude oil, 2.4 million barrels (+1% vs. ’15); natural gas, 10.1 billion cubic feet (-4% vs. ’15). Reserves as of 12/31/16 were 20.0 billion barrels of oil equivalent, 53% oil, and 47% gas. The 10-year average reserve replacement rate is 82%. The daily refinery runs in 2016 were as follows: 4.3 million barrels (-4% vs. ’15); product sales, 5.5 million barrels (-5% vs. ’15); chemical sales, 24.9 million tons (+1% vs. ’15).
— Robert Mitkowski
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
