On the day that saw the DOW give up all of its gains for the year, the market was led lower early by disappointing Q2 results posted by the worlds largest Major Integrated Oil & Gas company Exxon Mobil Corporation (NYSE:XOM). A sense of foreboding may have been building for the last few weeks or months, but coming into Thursday--with the Argentine Default looming, unemployment numbers, and some very important earnings announcements--the storm surge came ashore.
The VIX hit a four month high during Thursday's session, and 1992 U.S. Investing Champion Mark Cook has recently called for a 20% or greater pullback within the next 12 months. "Think of a dam that has small cracks that are imperceptible to the eye," he says. "Finally, the dam gives way. Eventually, prices will go south, and the Tick numbers will be horrific."
For XOM's part they beat by earnings per share of 2.05 compared to the street expectation of 1.91 (and 1.93 via Estimize.com) and on revenue of 111,647 compared to the street expectation of 109,143 (109,200 via Estimize). This would have been a literally blow out quarter except for one thing--6% decline in Oil and Gas Production. In fact, a full $1.2B is attributed to one-time asset sales in Asia, so once that context has baked into the numbers we can start to see the concern investors have with XOM's long term prospects. The decline in production was the result not only of natural field decline, but also the expiration of field rights in Abu Dhabi and seasonally low natural gas demand.
Looking at XOM from my metric based approach, there is not a lot to like here. The systemic production decline which has been a known issue for XOM for some time is now firmly visible in the Earnings and Revenues, which have all show noticeable declines, including a 24% decline this year thus far. XOM is on the wrong side of the fifty-yard line of the Consensus Analyst Recommendation score, albeit by only .1 (2.6). I expect to see this degrade in the near term. And while the P/E ratio is a healthy 13.97, the PEG is a very unhealthy 3.61. THe dividend yield is a bit lower than I would normally look for at 2.67%, and with today's close of -4.17% XOM is only -5.56% off of the 52 week high.
Compare this however with Thursday's earnings release by ConocoPhillips (NYSE:COP), which squeaked out a 1 cent beat on the street expectation of 1.60 (1.58 via Estimize) and a full 300M in revenue. COP was down with the broader market today, surpassing the S&P 500 decline of 2% by an additional 0.52%. COP may have had a better overall price realization, reporting an average price of $103.53 per barrel. XOM reported price realization of $98.55 per barrel in the U.S. while selling for $103.72 outside the U.S. And unlike XOM, which has to tackle their declining production, COP expects to deliver between 3-5% growth in 2014.
Aside from also trading within 5% of the 52 week high, COP is better than XOM in every single metric I use for comparison. The PEG is 1.9, and the Consensus Analyst Recommended score is a very nice 2.3. The dividend at the current price is 3.26%, which is passable on my normal screen, and the consensus target price of 89.64 is an almost 8% improvement from Thursday's closing price. Both COP and XOM sport similar short ratios (5.0 and 5.3), but COP has a much better Price-to-Book of 1.9 compared to XOM's 2.53.
Overall Thursday just proved what I have thought for a long time: COP is the far superior play between itself and XOM. About four years ago I did my original screen on the sector and was surprised when XOM was excluded from my portfolio. I have not regretted it once since.
Disclosure: The author is long COP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.