- The decline in the share price, which came on the announcement, was an overreaction.
- With the stock hovering at $102, I'm raising my price target by $5 and project fair value to reach $115 on the basis of the company's quicker recovery pace.
- Management will initiate more share buybacks and higher dividends in the next 12 to 18 months.
Being one of the largest companies in the world that deals with gas, refining, and chemicals, Exxon Mobil (NYSE:XOM) doesn't always get the credit it deserves. Not only has this international crude oil and natural gas company been consistently profitable, but Exxon has a strong track record for returning value to shareholders.
Despite this strong reputation, investors were still unsure of what to expect from the company's first-quarter earnings results, given how challenging production growth has been in North America. As it stands, management has had a harder time turnings oil into cash. But Exxon is still among the best-run oil and gas majors in the market. And after a solid first-quarter earnings beat, investors looking for exposure to energy can do so here with minimal risk. Because these shares offer more upside than initially believed.
Exxon Mobil reported first-quarter revenue of $106.8 billion, which represents a year-over-year decline of 1.5%, falling below last year's revenue total of $108.4. With better-than-expected results coming out from British oil giant BP (NYSE:PB), Exxon investors sold of the stock following the revenue miss. And it certainly didn't help that rival ConocoPhillips (NYSE:COP), reported $16 billion in first quarter revenue, which was up 10% year over year from $14.6 billion.
During the quarter, the company produced an average of 4.1 million barrels of oil equivalent per day, which was down from 4.4 million in the year-ago quarter. Management said the drop was due to (among other things) the expiration of its share of concession in Abu Dhabi.
In terms of profits, Exxon reported a first-quarter net income of $9.1 billion, down from $9.5 billion in the year ago period. This lead of a profit of $2.10 per share. But as noted, regardless of how the company has struggled in revenue, Exxon has consistently heated its earnings goals. Recall, the Street was looking for a profit of $1.88 per share, which means Exxon beat estimates by 12%.
The oil company's upstream earnings, which accounts for profit resulting from exploration and production of oil, arrived at $7.8 billion. Note, this figure does not include income from the refining and processing business. The $7.8 billion was boosted by $746 million helped by higher natural gas prices.
And it certainly seems as if management has figured out ways to produce higher oil profits, which many pundits doubted could be done following Exxon's downbeat guidance in January. This more than offset the decline in the downstream business, which fell to $813 million due to weaker margins. During the announcement, Rex Tillerson, Exxon Mobil chairman, said:
"Exxon Mobil's first quarter earnings and cash flow reflect the company's continuing focus on delivering profitable growth and creating long-term shareholder value. Strong performance in the upstream benefited from improved production mix and increased unit profitability."
I agree with Tillerson. And anyone that understands the deficits Exxon has worked to overcome has to see this quarter as encouraging. Management has done enough to convince investors that the company's long-term status as an energy power remains intact. And with the strong showing in the upstream business, I don't thing Exxon's production struggles will continue much longer. That said, the weakness in the refining unit and in the downstream business has to be addressed. And I believe it will.
To that end, investors have to trust that management will continue using its capital for the good. And I think the decline in the share price, which came on the announcement, was an overreaction. With the stock hovering around $102, I'm going to raise my price target by $5 and project fair value to reach $115 on the basis of the company's quicker pace of recovery.
And assuming that business conditions continue to improved North America, which should push production growth higher, Exxon will benefit from higher cash flow, which should spur more share buybacks and higher dividends in the next 12 to 18 months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.