Well it should come as absolutely no surprise to anyone that following the massive decline in oil prices that oil-related stocks have been crushed. The sector however has started to rebound as oil prices have slowly started climbing back this year. Still, they are well below the comfort zone for oil majors. One blue chip name that we should always look to as a gauge for the health of the sector is Exxon Mobil Corporation (NYSE:XOM). Let's get real here. Just about anyone who has ever bought a stock knows of this company and most who have put fuel in their vehicles know of this global brand. Late last fall I highlighted this name as a stock that looked very compelling, and has since generated returns. Let me be clear. It still is compelling for a long-term entry point. It is not a matter of if you should buy oil names, but when. Patience is the key. That said, let's take a look at how the company is performing and how it's handling the massive decline in prices.
Obviously with the low price of oil, the company is making less money. That is reality. However, what should be taken as a positive is that the company is beating analysts' estimates for performance. The company's Q1 2016 earnings in at $1.8 billion, or $0.43 per share. This beat estimates by $0.12. Obviously, this is down heavily from the $4.9 billion a year earlier. In fact, this is a 63% decline. This decline was, of course, to blame on oil but is due in part to much lower upstream realizations compared to the improvement in downstream and chemical earnings. Chemical production was strong, but not enough to offset lower commodity prices and lower refining margins. Now, upstream production volumes did increase 10% in two quarters to 4.3 million oil-equivalent barrels per day. While liquids volumes 12% to 2.5 million barrels.
Now, the performance of the company has been admirable. Rising production is a sign of operational strength despite the fact that the company has been slashing expenses. The increased production led to more sales and a revenue beat. Revenues were, of course, down 28% year-over-year, but beat estimates by a whopping $3.3 billion. They came in at $48.71 billion. While these numbers are key, the sector is of course still struggling. What the company has been forced to do like so many others is to pull out all the stops to cut spending and expenses. Trimming the fat is easy. Now the company has to be careful. It is trying to cut spending without damaging the vitality of the business. It has been difficult, but necessary. I think the company has been very successful. Just look at the decline in capital and exploration expenditures. Worldwide they were $5.1 billion, down 33% from Q1 2015 while, at the same time, the company is churning out increases in production.
What is more impressive is that despite the extreme margin pressure, the company is financially protecting shareholders. First, let me say that cash flow from operations and asset sales was $5.0 billion, and this to me is very strong, even if it is down from $8.5 billion in Q1 2016. It is expected that cash flow would decline, but I thought it could have been worse. The company remains incredibly shareholder friendly. In fact, the company distributed $3.1 billion to shareholders in Q1 2016 via dividends. What is more is that despite the terrible operating environment dividends have been raised versus last year. The company now pays dividends per share of $0.73, up 5.8% from Q1 2015.
Now look, I don't know where oil is going but I see it moving higher over idle. It could move lower again this year, but more and more rigs are offline. The demand and supply curve will even out soon enough. We were oversupplied and still are, but globally production is coming down. That said I think shares are still a long-term buy here. You have to take advantage of market weakness. Add on the next pullback. Oil and gas aren't going anywhere. Renewables are important and have their place, but they will not replace oil fully in our lifetimes. But let's get real. Sometimes the simple advice is best. Buy quality companies at a fair price. That is where I see XOM right now.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
Disclosure: I/we 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.