Exxon Mobil Has Surprised Again

| About: Exxon Mobil (XOM)

Summary

Despite the challenging environment, Exxon Mobil delivered quarterly results that exceeded estimates.

The chemical segment was the main contributor to earnings with 62% of the company's total profit.

Market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year.

As such, we can expect much better results for Exxon's upstream operations in the forward quarters.

In my view, XOM's stock should be included in every diversified large cap dividend stocks portfolio.

In my previous article about Exxon Mobil (NYSE:XOM) from April 10 "What To Expect From Exxon Mobil's Earnings Report" I wrote that according to 19 analysts' average estimate, Exxon is expected to post a profit of $0.33 a share. However, since Exxon had shown earnings per share surprises in most of its previous quarters there is a good chance that the company will beat estimates also in the first quarter, and that really is what has happened.

On April 29, Exxon Mobil reported its first-quarter 2016 results that beat EPS expectations by a significant margin of $0.12 (38.7%). Also, revenues of $48.71 billion were higher than the consensus estimate of $47.05 billion. Exxon showed earnings per share surprise in its last three-quarters after missing expectations in the previous quarter, as shown in the table below.

Data: Yahoo Finance

First Quarter Highlights

  • Earnings of $1.8 billion decreased 63 percent from the first quarter of 2015.
  • Earnings per share were $0.43 assuming dilution.
  • Cash flow from operations and asset sales was $5 billion, including proceeds associated with asset sales of $177 million.
  • Capital and exploration expenditures were $5.1 billion, down 33 percent from the first quarter of 2015.
  • Oil equivalent production increased 1.8 percent from the first quarter of 2015, with liquids up 11.5 percent and gas down 9.3 percent.
  • The corporation distributed $3.1 billion to shareholders in the first quarter of 2016.
  • Dividends per share of $0.73 increased 5.8 percent compared with the first quarter of 2015.

In the report, Rex W. Tillerson, chairman and chief executive officer, said:

The organization continues to respond effectively to challenging industry conditions, capturing enhancements to operational performance and creating margin uplift despite low prices. The scale and integrated nature of our cash flow provide competitive advantage and support consistent strategy execution.

The chemical segment earnings increased 38% year-over-year, and 41% from the previous quarter to $1,355 million. The segment was the main contributor to earnings with 62% of the company's total earnings. That was the strongest quarter for the segment since 2012. The chemicals division benefited from stronger margins and higher sales volumes, as the price of raw materials, oil and gas, plunged compared to last year's first quarter. According to Exxon, the business is capturing increased specialty and commodity product demand along with significant cost benefits from both gas and liquids cracking advantages at its integrated sites.

Source: company's reports

Upstream earnings declined from a profit of $2,855 million in the first quarter of 2015 to a loss of $76 million in the recent quarter. Lower liquids and gas realizations decreased earnings by $2.6 billion. Sales mix effects decreased earnings by $100 million. On an oil-equivalent basis, production increased 1.8% from the first quarter of 2015. Liquids production totaled 2.5 million barrels per day, up 261,000 barrels per day, while natural gas production was 10.7 billion cubic feet per day, down 1.1 billion cubic feet per day from 2015. The U.S. upstream operations recorded a loss of $832 million in the first quarter, compared to a loss of $52 million in the first quarter of 2015, and a loss of $538 million in the previous quarter. Non-U.S. upstream earnings were $756 million, down $2.2 billion from the prior year.

Source: company's reports

Downstream earnings were $906 million, down $761 million from the first quarter of 2015, and down $445 million from the previous quarter. Weaker margins decreased earnings by $860 million. Volume and mix effects increased earnings by $10 million. All other items, primarily favorable foreign exchange effects, increased earnings by $90 million. Petroleum product sales of 5.3 million barrels per day were 480,000 barrels per day lower than the prior year's first quarter. Earnings from the U.S. downstream were $187 million, down $380 million from the first quarter of 2015, and $248 million from the previous quarter. Non-U.S. downstream earnings of $719 million were $381 million lower than last year, and $197 million from the previous quarter.

Source: company's reports

Looking Forward

Oil prices have shown a significant rebound in the last three months. As such, we can expect much better results for Exxon's upstream operations in the forward quarters. Brent crude oil last price of $47.37 per barrel is already up 53.6% from its 12-year low on January 20, of $30.84, while WTI crude oil last price of $45.92 per barrel is up 44.5% from its January 20 low of $31.77.

According to OilPrice.com, the collapse of the rig count and depressed drilling activity has already knocked about 700,000 barrels per day of oil production offline. However, the rig count could bottom out this year and begin climbing again. Nevertheless, the U.S. Department of Energy [EIA] does not expect oil production to rise in the short run even if the rig count rebounds. Oil production is expected to continue to fall through 2017 as too few new wells come online to replace rapidly falling shale output. Total U.S. oil production is expected to decline from 9.43 million barrel per day in 2015 to 8.04 million barrel per day in 2017, a figure that includes rising output from the Gulf of Mexico. According to EIA, the sharp decline in oil prices since the fourth quarter of 2014 has had a significant effect on drilling in the United States. The number of active onshore drilling rigs in the Lower 48 states fell 78% (from 1,876 to 412) between the weeks ending on October 31, 2014, and April 15, 2016, according to data from Baker Hughes (NYSE:BHI). The decline in active rigs and well completions is projected to result in month-over-month onshore oil production declines of 120,000 barrel per day through September 2016. All in all, market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year.

Brent Crude Oil, July 2016 Leading Contract With 50 Day Moving Average

WTI Crude Oil, June 2016 Leading Contract With 50 Day Moving Average

Charts: TradeStation Group, Inc.

Dividend and Share Repurchase

The company lost its sterling AAA credit rating by S&P earlier last week, a perfect rating that it has held for more than 80 years. S&P was concerned about rising debt levels and a hefty shareholder dividend that weighs on cash flow. Nevertheless, a day later Exxon announced an increase of its dividend by 2 cents per share or a 3% raise. The forward dividend yield is pretty high at 3.40%, and the payout ratio is at 74.9%. The annual rate of dividend growth over the past three years was pretty high at 9.7%, over the past five years was also high at 10.6%, and over the last ten years was also high at 9.7%. Exxon has increased its annual dividend payment to shareholders for 33 consecutive years. Even during the global economic crisis of the years 2008-2009, Exxon continued to grow its dividend.

During the first quarter of 2016, Exxon purchased 9 million shares of its common stock for the treasury at a gross cost of $726 million. These shares were acquired to offset dilution in conjunction with the company's benefit plans and programs. The corporation will continue to acquire shares to offset dilution in conjunction with its benefit plans and programs, but does not currently plan on making purchases to reduce shares outstanding.

XOM Dividend Chart

XOM Dividend data by YCharts

Since the beginning of the year, XOM's stock is up 13.4% while the S&P 500 Index has increased 1.0%, and the NASDAQ Composite Index has lost 4.6%. However, since the beginning of 2012, XOM has gained only 4.3%. In this period, the S&P 500 Index has increased 64.2%, and the Nasdaq Composite Index has risen 83.3%.

XOM Daily Chart

XOM Weekly Chart

Charts: TradeStation Group, Inc.

Summary

Despite the challenging environment, Exxon Mobil delivered quarterly results that exceeded estimates. The chemical segment was the main contributor to earnings with 62% of the company's total profit. Oil prices have shown a significant rebound in the last three months, and market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year. As such, we can expect much better results for Exxon's upstream operations in the forward quarters. In my view, XOM's stock should be included in every diversified large cap dividend stocks portfolio. While waiting for a continued recovery in the price of oil, investors can enjoy the generous dividend yielding 3.4% a year. The company has a long record of 33 years of continued raising its dividend. Even during the global economic crisis of the years 2008-2009, Exxon continued to increase its dividend.

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.

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