The energy sector has been under pressure due to a slowdown in demand, resulting from the poor performance of the global economy. Most of the participants have faced falling production levels as well as a drop in earnings; however, Exxon Mobil (XOM) was able to report impressive results due to the diversified operations and its massive size. Let's look at the performance and future prospects of the company.
A Look at the Quarterly Performance
The company reported earnings of 9.5 billion in the first quarter of 2013 as compared to 9.45 billion for the same quarter last year. Exxon recorded a year-over-year increase of 6% in EPS, hugely impressive in the current economic conditions. An increase in earnings was welcome news for its investors as other energy giants such as Shell (RDS.A) and Chevron (CVX) were reporting losses. The increase in profits in the first quarter was largely attributed to the increase in earnings from the chemical operations. However, Exxon reported a decline in profits from the oil and natural gas operations, mainly due to the macroeconomic conditions prevailing at the moment. Fortunately, the losses were well-cushioned by chemical operations.
The company operates in a highly volatile environment, and earnings are heavily exposed to the commodity price risk. However, the market risks, mainly price and interest rate risks, are offset by the corporation size, strong capital and geographic diversity. Furthermore, Exxon maintains a high-quality investment portfolio to help mitigate the risk.
Exxon has announced plans to expand its production base by acquiring oil and gas fields in North America and Russia. At the moment, the energy sector is facing the prospect of depleting reserves, and almost all the participants are looking at new avenues to make up for the losses in the reserves. As a result, we have seen a shift towards offshore drilling and shale plays. Exxon's decision will be hugely beneficial as it will mitigate the shortfall in production as well as meet the anticipated increase in demand due to an increase in the world population. The world population is expected to increase by 25% by 2040 accompanied by a surge in energy demand.
Dividend and Cash flows
Exxon pays quarterly dividend of $0.63 per share, yielding 2.8% -- the dividend yield is lower than some of the other stocks in the market; however, there are a few companies that possess Exxon's financial strength and ability to maintain or grow dividends. The company raised dividends by 21% recently. The payout ratio of the company did not exceed 50% thereby providing growth as well as income earning opportunities to its investors. Free cash flows for the company have come down during the past 12, mainly due to an increase in the capital expenditures.
Trailing 12 month free cash flows of the company stand at $21.9 billion, compared to $24 billion reported a year ago. In the meantime, CAPEX for the company has gone up to $34.2 billion, compared to $30.9 billion reported at the end of last year. So, the decline has mainly come from the increase in CAPEX while operating cash flows have gone up to $56 billion, compared to $55 billion at the end of the last year.
The company is spending heavily in CAPEX to add to its depleting reserves - high CAPEX is a norm in the industry. The industry in general has experienced a decline of 1% in free cash flows over the last year. However, oil prices are expected to increase in the near future and that will help improve the industry trend.
In my opinion, Exxon Mobil is well positioned to grow over the next three-five years - the company is enhancing its reserves base, and an expected rise in demand will be met through increased production. However, there are certain macroeconomic risks associated with investment in this stock that cannot be denied. Firstly, the industry is prone to stringent state and environmental regulations, which pose unanticipated risks to the business. Secondly, the nature of the business is subject to cyclical shocks, which presents a major threat to the core operations of the company. Nonetheless, Exxon Mobil remains a compelling investment, which will yield solid returns in the long term. The company has low risk exposure and the stock will suit a number of portfolios, growth as well as income.