Exxon Mobil (XOM) has announced a quarterly dividend of $0.57 per share, which is an increase of 21% over the previous dividend of $0.47 a share in February this year. Shortly thereafter, the company announced its results for the first quarter of 2012 and earnings were weaker than expected. Post-tax earnings were down by 11% at $9.45 billion, which translates into earnings per share of $2 compared to a consensus estimate of $2.09 and earnings per share of $2.14 for the same period in the previous year.
Exxon, which is the largest oil company in the world in terms of market cap, was affected by reduced production and weak natural gas prices in North America, which offset the benefits of higher oil prices. Operations in the U.S. were weaker than global operations, and upstream earnings from oil and natural gas dropped by 21% during the quarter. Profits from the U.S. chemicals and refining businesses also fell. U.S. natural gas prices fell to a 10-year low in the context of adequate supply and weak demand because of an unusually mild winter. The number of rigs drilling for natural gas in the North American continent has been reduced sharply, but supply has been supported by the gas that is produced as a byproduct of booming oil production.
In Europe and Asia, gas prices are generally tied to oil prices because of long-term contracts, which make these markets much more profitable than the U.S. As a result, revenues from upstream activity outside the U.S. were down only by 8%. Some of the decline in the oil and gas production is due to factors such as OPEC quota restrictions and production sharing contracts with oil-producing countries that will take a higher share of the production when oil prices increase. Nevertheless, even after taking these things into account, production was still down because of the declining output from existing fields, which were not completely balanced by new fields coming onstream. Exxon also reported that it had bought back shares worth $5 billion in the first quarter and planned to buy an additional $5 billion in the second quarter.
The dividend continues to disappoint a large number of investors. The company is not noted for being generous with its dividend payments, and the payout ratio has been in the region of 25%. This policy is a sharp contrast to other oil majors such as Royal Dutch Shell (RDS.A) and Total (TOT). The company certainly has the financial ability to provide a better dividend yield than the current yield of less than 3%. However, it seems to believe that its large stash of cash is better utilized for buybacks, which could provide more value to shareholders. Only time will tell which argument is right.
One major initiative that could distance Exxon from its major competitors is the partnership it has unveiled with Rosneft (ROSN) of Russia. The deal could see an investment of up to $500 billion in developing Russia's gigantic reserves in the Black Sea as well as the Arctic. This deal was a year in the making, despite complications in dealing with Russia. The two companies are seeking to develop three fields in the Arctic with estimated recoverable reserves of 85 million barrels. The Russian government has committed to removing export duty, cutting the tax on mineral extraction, and keeping taxation stable for 15 years to facilitate the completion of this deal. In addition, if the venture proves to not be viable for reasons beyond the control of the partners, it would be exempt from taxation in Russia. Exxon, like the other oil majors, has been under pressure to add to its reserves of 25 million barrels as oil-rich countries seek to have a greater say in the use of the oil reserves. It is apparent that this deal could prove to be a huge boost for Exxon.
For Exxon, this also means clinching a deal that had previously proved to be beyond the grasp of BP (BP). An initial investment of $3.2 billion will be made in exploration activity in the Black Sea and the Kara Sea. It will have one-third of the new venture, while Rosneft will own the rest. Rosneft will also get a minority 30% stake in Exxon projects in Texas, Canada, and the Gulf of Mexico. There will also be a transfer of technology to Western Siberia where it controls large results of oil in non-porous rock formations. In the world of oil it helps to be big, and companies don't come bigger than Exxon. The dividend yield is currently over 2% and investors can look forward to dividend growth as well as a higher stock price.
Royal Dutch Shell is a formidable rival with operations in almost 100 countries and refining operations at 30 refineries. However, it must be said that on a like-for-like basis, Exxon has consistently outperformed Royal Dutch and has constantly sought to innovate instead of sitting back. In my opinion, these developments would easily outweigh the decline in production for the first quarter of 2012, which is why I rate Exxon as a strong buy. After all, it is one of the most valuable companies in the world with large reserves, strong cash flow, great technical skills, and a high level of management. PetroChina (PTR) is now the largest oil producer in the world, but the associated uncertainties make it a less desirable investment.
When you consider that oil and natural gas prices are showing an upward trend, investors in Exxon are bound to benefit -- especially since the company has sought to balance its vulnerability in the U.S. by bolstering its international operations. Even if you are skeptical about the oil and natural gas business, you should continue to hold on to an existing investment until you see the impact of the Russian venture.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
