The earnings report
In the last 6 weeks, Exxon Mobil (NYSE:XOM) has lost about 9% off its all-time high of $95.5. Most of the decline has taken place after the earnings report of Q2-2013. A 9% decline when the Dow Jones has lost 4% would not normally be a great concern. However, Exxon Mobil usually outperforms the market during decline periods and should have definitely outperformed the market in this case, as the oil price has risen by 5% during this period (Exxon generally outperforms the market when oil rises and underperforms it when oil falls).
Therefore, the last earnings report must have been markedly disappointing. Indeed, the net income of $6.9 B constitutes the worst performance of the company since Q1-2010. In other words, the company returned its performance to the early stages of the recovery from the Great Depression of 2009. The earnings per share (EPS) decreased by 55% to $1.55; excluding last year's divestment and tax issues, the EPS declined by 14%.
Moreover, the total upstream production decreased by 2%. This is just another disappointing production figure of Exxon in the last few years, which confirms that Exxon has a hard time raising its upstream volumes. The upstream volumes are critical for Exxon as the upstream generates about 90% of its total earnings.
Another disappointing aspect of the earnings announcement was the decrease in share buybacks. Exxon has been consistently repurchasing $5 B of its stock every quarter in the last 4 years. However, in the second quarter the company reduced this amount to $4 B and, even worse, anticipated a further decrease to $3 B for the third quarter. This means that the company either projects that it will not have the sufficient earnings to support its capital investments and maintain its generous distribution to its shareholders or the company considers its share price overvalued at the moment. As the share price has been fluctuating around $90 for more than a year, the former explanation becomes more probable.
In my opinion, the worst part of the earnings report was the content of the announcement from management. First of all, management boasted that its results reflected continued strong operational performance. If the management is satisfied with these results, shareholders should start to worry. Even worse, in the brief description of the results, management mentioned the steep decline of earnings and attributed it mainly to the "weak refining margins and refinery maintenance." As the upstream sector generates 90% of the total earnings and is responsible for the $1 B out of the $1.5 B of the decline of the earnings, shareholders should have probably expected an explanation for the poor performance in the upstream sector instead of blaming the weak refining margins that the company cannot affect at all.
The long-term outlook
To sum up, the performance of Exxon was very disappointing in the last quarter. However, even the best companies face periods of setbacks or stagnation but they always manage to advance at some point. I believe that this will prove true for Exxon as well. As I have analyzed in a previous article, Exxon Mobil is an outstanding company that has managed to almost triple its earnings in the last decade while carrying a low amount of net debt ($100 B) compared to its earnings (~ $35 B). Even better, the share has a low P/E of about 11.5 and the company rewards its shareholders with a 3% dividend and a minimum 3% buyback rate (calculated with the anticipated reduced rate of $3 B per quarter). The only question is at what price an investor should pull the trigger and purchase shares for the long term.
The technical picture
The stock has pronouncedly declined since the end of July. However, in the last two weeks the decline has paused thanks to the geopolitical risk of Syria and the subsequent rise in the oil price. The extended 2-week pause after a steep decline usually signals that there is further decline to follow. When a stock rebounds after a major decline, it usually does abruptly and does not provide so much time to investors to think about it. Therefore, I expect the stock to decline further.
Regarding the extent of the decline, there is major support at $85, which has held firm 3 times in the last 52 weeks, so I would purchase some shares at $85. However, if the stock market incurs a major correction, the stock may drop even to $78-$80. I do expect a major temporary correction 10%-15% from the current level in the market, as we have not experienced one in the last 2 years and the black clouds (tapering of Fed's program, debt ceiling) have started to accumulate. As stated, I believe the correction will be only temporary and hence a buying opportunity.