Oil industry giant Exxon Mobil (XOM – Free Exxon Mobil Stock Report) has reported disappointing second-quarter earnings per share of $0.92, versus our estimate of $1.15, and its shares fell sharply following the news. Investors were expecting better performance, since oil prices had improved earlier this year. But the company incurred significantly higher-than-envisioned refining maintenance costs of $800 million in the quarter, plus several hundred million dollars of foreign exchange headwinds. Assuming the maintenance work has been largely completed, we are maintaining our estimate for full-year 2018 share profits of $4.65. Our thinking is that the company can make up the shortfall over the course of the year, assuming oil prices hold up.
There also was a letdown in combined oil and natural gas production, compared to a year ago, as the amount of volume pumped fell 7%. The big drop was attributable mainly to lower natural gas sales in the United States. Low natural gas prices have reduced the incentive to produce, in what is turning out to be a long-running story. Exxon in 2010 purchased XTO Energy in a move designed to capitalize on cutting-edge drilling techniques enabling much greater amounts of natural gas to be pumped. Unfortunately, the surging volumes that ensued have kept realizations on the low side ever since. Note: Similar concerns that oil prices would remain subdued for an extended period as shale drilling has taken off have been alleviated by the OPEC-Russia pact to keep substantial amounts of oil off the market.
Elsewhere, international refining results were hurt by the elevated maintenance costs and the foreign exchange losses noted above. And while domestic refining operations turned in nicely higher profits on improved margins and higher sales, performance in the chemicals line was lackluster.
Overall, this was an uninspiring earnings report, and Wall Street registered its disenchantment. However, investors that are able to look past the recent difficulties may find a powerful company focused on the future. Exxon Mobil is bucking the industry trend of limiting spending to build positions in oil drilling, with the goal of increasing production by 25% within about five years. Growth initiatives also include expanding the company's existing manufacturing and export capabilities for refined and chemicals products. Conservative investors may enjoy a very good dividend yield here, while waiting for the company to turn its operations around. Total-return potential out to 2021-2023 is attractive for such a high-quality stock.
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 2017 was as follows: crude oil, 2.3 million barrels (-4% vs. ’16); natural gas, 10.2 billion cubic feet (+1% vs. ’16). Reserves as of 12/31/17 were 21.2 billion barrels of oil equivalent (57% oil and 43% gas). Reserve life at the current production rate is 14 years. The daily refinery runs in 2017 were as follows: 4.3 million barrels (flat vs. ’16); product sales, 5.5 million barrels (flat vs. ’16); chemical sales, 25.4 million tonnes (+2% vs. ’16).
- Robert Mitkowski
