Exxon Mobil - Fair Value As Production Challenges Remain

Jan.30.14 | About: Exxon Mobil (XOM)

Exxon Mobil (NYSE:XOM) reported fourth-quarter earnings which are slightly disappointing. Continued production declines and higher expenses put a toll on earnings.

Shares are fairly valued at this point in time, but remain a solid investment in any long-term dividend-oriented investment portfolio.

Highlights For The Fourth Quarter

Exxon generated fourth-quarter revenues of $110.9 billion which is down by 3.3% on the year before. Consensus estimates for revenues stood at $114.9 billion. Unfortunately the energy major did not manage to reduce expenses at a similar pace, putting pressure on earnings.

Reported GAAP earnings fell by 16.1% to $8.35 billion. As a result of share repurchases the fall in earnings per share was limited to 13.2%, with earnings coming in at $1.91 per share. This was in line with consensus estimates.

Details To 2013's End

The rapid increase of capital expenditures in recent years including 2013 could not avoid a 1.8% decline in oil-equivalent production. This has been the driver behind the revenue and earnings declines reported today. Oil-equivalent production came in at 4.22 million barrels per day, of which 2.22 million barrels were actual oil production.

Upstream earnings fell by 12.6% to $6.8 billion as a result of lower oil prices, lower production, an adverse mix and higher operating expenses. Downstream earnings halved to $916 million on weaker refining margins, lower volumes and adverse mix effects.

Not A Great Year

2013 has not been a great year for Exxon as reported earnings fell by 27% to $32.6 billion. At the same time, Exxon increased its annual capital expenditures budget by 7% to $42.5 billion, including $4.3 billion of acquisitions.

Note that the company cut the pace of investments to just below $10 billion in the final quarter, undoubtedly as a way to preserve some cash in the light of falling earnings.

Capital Expenditures And Shareholder Payments

2013 has been an "expensive" year for the company. Besides investing $42.5 billion in new and existing projects, Exxon spent $26 billion on share repurchases and dividends.

The $26 billion returned to shareholders, represents an 80% payout ratio over 2013 earnings. Yet cash flows through depreciation charges did not come close to annual capital expenditures which totaled $42.5 billion per annum last year, or $116 million per calendar day.

Capital investments to boost growth and higher payouts to investors pushed the company in debt over the past few years. Back in 2009, the firm operated with a flat net cash position. As I have not seen fourth quarter balance sheet yet, I resort to the third-quarter report. Exxon held $5.3 billion in cash at the time, while its debt position increased towards $21 billion, marking a steady increase in leverage in recent years.


At $94 per share, Exxon Mobil's shares are valued at $410 billion. This values the company at about 1.0 times annual revenues and 12-13 times annual earnings over the past year.

The $0.63 per share quarterly dividend provides investors with a 2.7% dividend yield, while total returns of $26 billion provide investors with a 6.3% direct return based on today's valuation.

As such the absolute valuation, the payouts to investors and balance sheet remain in check. Yet I am cautious at current levels after the stock has risen by almost a fifth over the past year, while earnings have fallen. At the current pace earnings are under continued pressure on the back of slight declines in production as investments still have to pay off.

Furthermore, investments are targeted to more riskier projects. CEO Tillerson reiterated however that a production ramp-up in the coming years will boost reverses and continues to target a 3% increase in production by 2017.

Back in December, I urged investors to take some profits off the table after shares rose by $15 since mid-October towards a $100 per share at the turn of the year. Momentum at the time was driven by the purchase of a stake by Buffett in the company and a solid third-quarter earnings report.

I continue to be cautious after the momentum in recent months. While the company remains a solid addition to any long-term portfolio, the lower earnings, production and modest increase in leverage might put pressure on the shares this year. This is despite the solid payouts to investors.

I remain on the sidelines.

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.