Exxon Mobil - Production Growth Offers Potential For Growth

| About: Exxon Mobil (XOM)

Shares of Exxon Mobil (NYSE:XOM) saw a modest jump after the energy giant reported a solid third quarter earnings report, which contained the first production increase in over two years.

Exxon aims to offer both production growth as well as high returns to shareholders, making it a core holding for any investor with a long-term outlook, in any well-diversified portfolio.

Third Quarter Results

Exxon Mobil generated third quarter revenues of $112.37 billion, down 2.4% on the year before.

As costs were increasingly slightly, the fall in revenues hurt profits badly. Net earnings attributable to shareholders fell by 17.8% to $7.87 billion.

On the back of share repurchases, the fall in earnings per share was limited to 14.3% to $1.79 per share. Analysts were looking for earnings of $1.77 per share. Chairman Rex Tillerson commented on the third quarter performance,

"Exxon Mobil's third quarter results reflect our continued progress across a diverse set of profitable growth opportunities, which positions us well to deliver shareholder value. We maintain a long-term perspective on our business with a relentless focus on operational excellence and disciplined investing."

Looking Into The Results

As is the case with most major oil companies, weak quarterly earnings are attributable to poor refining conditions. Upstream earnings rose by 12% to $6.7 billion, driven by a strong performance of the US activities.

Earnings growth was driven by a 1.5% increase in oil-equivalent production as well as higher liquids and natural gas prices. To secure continued production growth, Exxon stepped up its capital expenditures by some 15% to $10.5 billion. At the moment, oil-production totaled 2,199k barrels per day, as oil-equivalent production came in at 4.0 million barrels.

Downstream earnings saw a big drop in earnings, falling by over 81% to just $592 million. Weaker refining margins hurt earnings by $2.4 billion, as the mix and lower asset sales took a toll on earnings. Petroleum sales were about 6.03 million barrels per day for the quarter.

Chemical earnings rose by nearly 30% to just over a billion on the back of higher commodity margins.


Exxon Mobil ended its third quarter with $5.7 billion in cash, equivalents and short-term investments. Total debt stood at $21.3 billion, for a net debt position of $15.6 billion.

Total revenues for the first nine months of the year came in at $327.4 billion, down 10.5% on the year before. Note that earnings attributable to shareholders fell by 30.7% to $24.2 billion.

At this pace, annual revenues of around $440 billion should be attainable as earnings could come in around $32 billion.

Trading around $90 per share, the market values Exxon Mobil at $395 billion. This values the company at 0.9 times annual revenues and 12-13 times annual earnings.

Exxon currently pays a quarterly dividend of $0.63 per share, for an annual dividend yield of 2.8%.

Some Historical Perspective

Long-term investors in Exxon Mobil have seen decent returns. Between 2004 and now, shares have more than doubled from $40 to current levels around $90 per share. Note that since 2007, shares have traded in a $60-$90 trading range. On top of these capital gains, investors have seen fairly attractive dividend yields as well.

Between 2009 and 2012, Exxon has increased its annual revenues by a cumulative 54% to $467 billion. Net earnings more than doubled from $19.3 billion to $44.9 billion in the meantime. Earnings per share growth was even more impressive as the company retired nearly 10% of its shares in recent years.

Investment Thesis

Exxon's results were well received as investors were notably impressed with the reported 1.5% increase in production. Excluding the impact of OPEC quota and other uncontrolled factors, production growth was 2.7%. Note that liquids production rose by 5.3%.

The first increase in production for a period of two years, could be more prolonged. Exxon already invested $33 billion so far this year, as high capital expenditures could result in more continued production growth.

Despite the positive developments, Exxon was forced to report weaker earnings, entirely attributable to weak refining earnings, which are outside of Exxon Mobil's control. Weak demand for fuels combined with global capacity growth in refining hurt margins badly.

As such, Exxon is now aiming to offer both growth and value to its shareholders. The higher pace of capital expenditures results in modest production growth for now, a trend expected to continue. Shareholders furthermore receive a $0.63 quarterly dividend, for annual payments of around $11 billion. Note that over the past quarter, Exxon furthermore repurchased $3 billion worth of its shares over the quarter, at a pace of $12 billion per annum.

Combined payouts of $23 billion, represent a yield of nearly 6% per annum to shareholders. The combined payout ratio in terms of dividend and repurchases of around 70% of earnings, allow for higher capital expenditures to continue to grow production.

Back at the start of October, I last took a look at Exxon Mobil's prospects after the company received an upgrade from analysts at Raymond James. I concluded that a 10% correction from July's highs towards $86 per share offered a nice entry opportunity.

For now production growth has been restored, as Exxon boosted earnings versus its second quarter. To be noted as well, Exxon is steering production growth away from volatile natural gas towards more profitable and predictable liquids production. For now, investors are used to the slowed down pace of share repurchases to $3 billion, as a dividend hike to $0.63 per quarter, provides sufficient cash flows to investors for now.

I noted as well, that Exxon traditionally traded at premium earnings multiples, as it is a core holding for many global shareholders. Yet the production growth and high cash flow yield provide investors with some prospects again.

I reiterate my stance. Shares of Exxon Mobil are an excellent addition to any long-term diversified portfolio.

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.