The massive decline in oil prices has resulted in oil-related stocks having been crushed. We know this. The sector however appeared as if it was starting to rebound as oil prices have slowly started climbing back this year. Of course, the last few months have seen weakness again. Oil-related stocks are still well off their 52-week lows, but with oil prices well below the comfort zone for oil majors, there is still a major risk to these stocks.
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). Late last fall, I highlighted this name as a stock that looked very compelling, and has since generated returns. Let me be clear. Despite the risk of low oil prices, XOM 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 concern is that the company is missing analysts' estimates for performance. The company's Q2 2016 earnings in at $1.7 billion, or $0.41 per share. This missed estimates by $0.23. Obviously, this is down heavily from the $4.2 billion a year earlier. In fact, this is a 59% decline. This decline was, of course, to blame on oil, but was also from 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 remain strong at 4.0 million oil-equivalent barrels per day. Liquid volumes were up, which offset weaknesses stemming from Canadian and Nigerian down-times.
Now, the performance of the company has been admirable. Continued strong production is a sign of operational strength despite the fact that the company has been slashing expenses. Production was not enough to stem lower pricing. Revenues were, of course, down 22% year over year, and missed estimates by a whopping $2.5 billion. They came in at $57.7 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. This has been a recurring theme throughout the sector. 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, perhaps much more so than the competition. Just look at the decline in capital and exploration expenditures. Worldwide, they were $5.1 billion, down 38% from Q2 2015, while, at the same time, the company is churning out strong production.
Cash flow is key. First, let me say that cash flow from operations and asset sales was $5.5 billion, and this to me is very strong even if it is down from Q2 2015. Of course, this includes about $1 billion in proceeds from asset sales. Now, given the massive drop in oil, it is expected that cash flow would decline, but I thought it could have been worse. The company remains incredibly shareholder friendly, and is doing all it can to maintain strong cash flow in this difficult time to protect the company and its shareholders. In fact, the company distributed $3.1 billion to shareholders in Q2 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 $0.75, up 2.7% from Q2 2015.
So what is the bottom line? The company has trimmed the fat and is now taking a scalpel to expenses. It is selling off assets to raise cash. Although expenses are down heavily, production remains strong. Dividends are higher than last year. Now, no one knows where oil is going, but I see it moving higher over time. 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. Take advantage of market weakness. Add on the next big 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. With that reality, buy XOM, a quality company, when the price declines to strongly attractive levels.
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.