Exxon Mobil (NYSE:XOM) will report second-quarter earnings Thursday. And, with worst-than-expected results coming out from BP (NYSE:BP), Exxon investors are on edge, biting their nails in anticipation of what Exxon management will announce.
Exxon stock closed Tuesday at $103.55, down 0.78%. The stock is up 3.7% on the year to date, trailing the energy sector's 14% gain. Revenue and production growth has been a struggle for Exxon. As the world's largest company that deals with gas, refining, and chemicals, the top line is never going to excite investors. But that doesn't mean Exxon can't fuel investors' portfolios.
Although North American weakness continues to present some headwinds, management has not lost focus on the bottom line. They've shown a strong track record of using the company's capital to return value to shareholders. And with the stock hovering around $103, the company's fair market value can reach $115 in the next 12 to 18 months.
This is on the basis of the company's quicker pace of recovery. On Thursday, analysts will want to see improvements in business conditions in North America. Assuming that Exxon is able to benefit from an uptick in production, this should push the stock higher. But understand, buying Exxon is not about one quarterly performance. It's about owning a piece of a company that is benefiting from higher cash flow, which should spur more share buybacks and higher dividends in the future.
On Thursday, Wall Street will be looking for $1.86 in earnings per share on revenue of $108.38 billion. This would represent an impressive 20% year-over-year jump in earnings, while revenue is projected to grow by 1.8%. But revenue is not the reason to own oil/energy companies.
Consider, in the most recent quarter, Exxon delivered revenue of $106.8 billion, which declined 1.5% year-over-year. Investors sold of the stock based on the revenue miss. The revenue decline was due to North American production declines. Exxon 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.
Despite the weak revenue, the company posted a profit of $9.1 billion, which was good enough to beat estimates by 12%, delivering earnings of $2.10 per share. Management doesn't always get the credit it deserves, but Exxon's bottom line always show that it is among the best-run oil and gas majors in the market.
If there are any risks here it has to do with the company's refining and downstream business, which are still showing signs of weakness. That business fell to $813 million in the May quarter due to weaker margins. Nevertheless, Exxon has consistently remained profitable. And I don't expect anything different on Thursday.
All told, the company's long-term status as an energy power remains intact. And investors looking for exposure to energy can do very well with Exxon, which continues to buyback its stock and pays one of the best yields on the market at 2.70%.
Disclosure: The author has 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.