Exxon Mobil (XOM) has had a markedly better third quarter compared to the second quarter of 2013. Third quarter diluted EPS stood at $1.79 compared to $1.55 in the second quarter (up 15%). Cash flow from operations including asset sales came in at $13.6 billion compared to $8.0 billion in the previous quarter. Capex remained stable at $10.5 billion in the third quarter (vs. $10.2 billion in the second quarter). Exxon Mobil's net debt position increased by $1.2 billion q-o-q.
Over the last year Exxon faced some problems in its downstream segment and took a substantial earnings hit because of lower refinery margins. Q3 2012 downstream earnings stood at $3.2 billion vs. 592 million in Q3 2013: Earnings decreased $2.6 billion of which $2.4 billion related to lower refinery margins. In the third quarter downstream earnings edged 49% higher to $592 million from $396 million in second quarter of 2013 (refinery margins continued to have a negative impact on segment results).
Upstream earnings increased by $408 million to $6.7 billion mainly driven by lower exploration costs and higher realizations. Chemicals also a decent quarter amid higher margins and higher volumes sold: Earnings increased $270 million to $1.0 billion in the third quarter compared to $756 million in Q2 2013.
Overall Exxon managed to increase earnings by 15% or add an additional $1.0 billion to Q2 earnings.
5-year High in sight
I still believe that the majority of firms in the exploration sector, whether they are large-cap oil majors with diversified global operations or more concentrated E&P companies in the U.S., trade at very low prices compared to their earnings potential. Exxon has repeatedly said this year that it sees challenges to global growth mainly coming from slowing growth in China and uncertainty about the status of the European economy. For long-term oriented investors who aren't evaluated on a quarterly basis and who have sufficient patience to sit out some setbacks, basic materials companies make great additions to their portfolios. Many companies trade at low multiples which underestimate the depth of their energy reservoirs.
Over the last year Exxon Mobil has lost 2% but marked a 5-year High at $95.20 on July 23, 2013. The shares are down 6% since then but have been recovering quickly for the last two weeks. Now, Exxon Mobil's 5-year High remains in sight. If momentum in light of strong Q3 results continues and Exxon can break through the resistance level at $95, the stock has immediately more upside potential.
Quality portfolio assets and low valuation
Exxon Mobil has gained 5% since the shares stopped sliding in October. Nonetheless, Exxon Mobile is still cheap at 11.25 times forward earnings but not as cheap as BP (BP) and Total (TOT). Chevron (CVX) commands a multiple of 9.83 forward earnings which is close to the peer group average of 9.70 (see below). Exxon is the largest oil producer in terms of market capitalization with key strategic oil- and gas assets stretching from Canada to Russia and Australia. A multiple of 11 just isn't appropriate for a cash flow strong company like Exxon. Exxon also has exposure to liquids-rich shale plays in the U.S. (namely Bakken, Woodford and Permian). The low valuation of the entire sector (average P/E of only 9.70) is driven primarily by macroeconomic factors such as slow growth in China and the U.S. Anti-cyclical investors looking for temporarily depressed valuations because of economic uncertainty will find a very interesting set of investment candidates in the basic materials sector and Exxon Mobil is one of them.
Exxon trades at a slight premium to the peer group average of 9.70 but is still relatively cheap considering its key portfolio assets. Dividend investors, however, might want to take a closer look at Total or BP which have much better dividend yields to offer.
Exxon Mobil's Q3 results were strong and the company continues to work its development pipeline with interesting upstream projects in the Kara- and Black Sea in Russia. Access to the most promising shale oil- and gas reservoirs like Bakken and Permian in North America add fantasy to the stock and increase the probability that future production levels will increase materially. Exxon also continues to remunerate owners and it has paid $5.8 billion to shareholders in the third quarter (this compares to shareholder distributions of $6.8 billion in Q2 2013). The valuations of large-cap oil players indicate that the sector as a whole is undervalued. Exxon remains cheap at a multiple of 11 forward earnings and higher global growth and increasing oil- and gas demand could very well push Exxon Mobil past the $95 mark. Long-term BUY.