Refining Profits Help Fuel Supermajors

Includes: CVX, PSX, VLO, XOM
by: Valuentum

Two of the world's largest oil companies, Exxon Mobil (NYSE:XOM) and Dividend Growth portfolio holding Chevron (NYSE:CVX), announced solid fourth quarter results last Friday. Exxon's fourth quarter earnings rose 12% year-over-year to $2.20 per share, easily exceeding consensus expectations, even though production declined 5.2% year-over-year. Production at Chevron was stronger, increasing 1.1% year-over-year, while earnings were fantastic, surging 43% year-over-year to $3.70 per share (well above consensus estimates).

After Phillips 66 (NYSE:PSX), Valero (NYSE:VLO), and the rest of the refining cohort reported stellar results, we were not at all surprised to see downstream earnings surge at both supermajors. Chevron swung from a loss of $61 million in the fourth quarter of 2011 to a profit of $925 million during the fourth quarter of 2012 - even after production fell 8%. Lower-cost inputs from domestic sources have reduced expenses at refineries, which has thus far had an enormously positive impact on refining margins. Downstream earnings at Exxon were 32% higher than those of the year-ago period thanks to improved margins and a better product mix. We remain quite bullish on the refining industry, as we're not ruling out that lower input costs could now be a permanent feature for industry participants.

Although downstream operations remain strong, upstream was weaker than a year ago at both firms. Exxon saw segment earnings decline 12% year-over-year to $7.8 billion, as lower prices for crude oil/natural gas and reduced production volumes weighed on results. Exxon has a few projects in the works, but we're not crazy about the firm's new production portfolio. We wouldn't be surprised to see the company make a sizable domestic shale investment/acquisition to help offset declining production, especially after it already acquired some Bakken assets in the fourth quarter.

Chevron announced slightly better upstream results, as production rose and segment earnings increased 20% year-over-year to $6.9 billion. Chevron anticipates a slight decline in the core business in 2013, but it also projects that it will meet 2017 production targets - which incidentally include meaningfully lower expectations for Brent crude oil prices ($79/bbl). We're taking this assumption as a measure of conservatism rather than any real prediction of a steady decline in energy prices in coming years.

Both companies continue to generate huge amounts of cash. Exxon and Chevron repurchased $5 billion and $1.25 billion worth of stock, respectively, during the fourth quarter, and both companies continue to pay solid dividends. We continue to believe both firms look like attractive dividend plays going forward, though we prefer Chevron, which is a member of the portfolio of our Dividend Growth Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Some of the firms mentioned in this article may be included in our actively-managed portfolios.