Exxon Mobil (NYSE:XOM) released its second quarter results on Thursday before the market open but investors were not very happy with the reported earnings which beat on consensus estimates.
The quality of the earnings was low with the 'beat' being driven by asset sales and higher prices as production declines are a major cause for concern.
I don't think that the current levels provide a great entry-point, while long-term investors should remain comfortable holding onto their high-dividend returning investment.
Second Quarter Headlines
For the past second quarter, Exxon reported revenues of $111.6 billion, a 4.7% increase versus last year.
The company posted GAAP earnings of $8.78 billion, a 28.0% improvement from the comparable quarter last year. The profit growth combined with modest pace of share repurchases resulted in a fifty cent improvement in reported earnings which came in at $2.05 per share.
This meant that earnings comfortably beat consensus estimates at $1.86 per share.
Looking Into The Performance
Of course earnings growth was driven by the upstream business which posted a 25% jump in earnings to $7.88 billion. Yet the quality of the earnings growth was a bit disappointing. Higher prices being realized added $580 million in earnings, while asset sales added another $1.2 billion. The lower production volumes did have a negative impact of about $200 million during the quarter.
Reported liquids production fell by 5.7% to 2.05 million barrels of oil-equivalent per day during the quarter, falling by 2.3% excluding the expiration of the Abu Dhabi onshore concessions. Gas production was down sharply as well resulting in world-wide oil-equivalent production falling to 3.84 million barrels, down by 5.7% as reported. Analysts were looking for production of 3.96 million barrels for the quarter, marking a sizable miss.
Downstream earnings improved notably as well, as reported earnings were up by 79% to $711 million. Lower refining margins impacted earnings by $330 million, offset by a fairly large positive impact of higher volumes and mix which added $280 million in earnings. Again, other items which include notably assets sales, aided earnings by some $370 million.
Exxon's chemicals business posted earnings of $841 million, up by $85 million compared to last year thanks to the improved market for commodities in general.
Unfortunately Exxon did not provide a consolidated balance sheet with its results this quarter yet. The company ended its first quarter with $5.6 billion in cash and equivalents while having $21.3 billion in total debt on its books. This resulted in a net debt position of about $16 billion, a very manageable amount for the company the size of Exxon.
On a trailing basis, Exxon has now posted sales of nearly $442 billion on which it posted earnings of about $34 billion. With 4.3 billion shares outstanding, the market currently values the company's stock at $434 billion with shares trading at $101 per share.
This values operations at 1.0 times annual sales and 12-13 times trailing earnings.
Solid Long Term Investment Record, Worries About Growth
Over the past decade Exxon has grown its operations from little less than $300 billion in sales to nearly $450 billion on a trailing basis. Earnings have grown from $25 billion to trailing earnings of $34 billion at the same time, peaking at highs of $45 billion in 2008 when oil prices were sky-rocketing. It should be noted that the company did repurchase a cumulative one-third of its outstanding share base over this time period, fueling earnings per share growth.
Yet most of these revenue gains relate to oil price inflation, and not really growth in the operations. As a matter of fact, production is declining at Exxon despite record highs in capital expenditures in recent years. The second quarter capital expenditure budget of $9.8 billion implies an annual run rate of nearly $40 billion, but was down 4% on the year before.
Of course the future will be focused on production growth with exploration earnings being so dominant versus the historical earnings of Exxon's chemicals and downstream oil business.
The company was happy to announce the first LNG shipment from Papua New Guinea ahead of schedule which is a positive sign. Despite operational progress on the huge Sakhalin project in Russia the future is not necessarily bright. Huge delays and budget overruns have limited the appeal of the project, not to mention the political devastating impact from the political situation in the country.
With earnings being aided by high oil prices and asset sales, and capital expenditures coming off their peak levels, there are large cash flows available to please investors despite falling production.
For the quarter, Exxon returned about $6 billion in cash to investors, roughly half split in share repurchases and the remainder in dividends. The $0.69 per share in quarterly dividends provides investors with a 2.7% dividend yield, while share repurchases imply another similar 'yield' from share repurchases.
The high current profits based on high oil prices, appealing dividends and generally low interest rate environment have pushed up shares in recent times, currently trading at around all time highs. Yet the quality of the operations, notably production growth is what largely drives the long term returns. These trends have not been very favorable, given the renewed miss on production estimates.
The problem is of course that high hopes for production growth are based on Russia's Sakhalin project, which of course faces a much more uncertain political roadmap on top of the operational challenges of the project.
With Exxon struggling to report meaningful growth and being underrepresented in terms of U.S. production, which is rapidly growing and politically safe, the company is often mentioned with regards to potential M&A activity in certain shale plays. Such a move could buy production and add to the growth potential, something which the company is missing now. Yet very strong multi-year momentum has made the price tag of such a potential adventure a bit more expensive.
As such shares remains a safe choice trading at low earnings multiples, while the company has a healthy financial state and pays out big dividends to investors. Yet the real appeal is not here at the moment unless Exxon can finally stabilize production.
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