As I always say, the one blue-chip name that we should always look to as a gauge for the health of the oil sector is, of course, Exxon Mobil Corporation (NYSE:XOM). In fall 2015, 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, and timing your buys strategically is of paramount importance. You have to recognize it will be a long-term game. 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 than a few years ago. In fact, the company has seen years of declines. That is the reality. However, what should be taken as a concern is that the company is missing analysts' estimates for performance. The company's Q4 earnings came in at $1.7 billion, or $0.41 per share. This was a miss of estimates by $0.29, but may not be comparable due to charges and adjustments. Obviously, this is down heavily from the $2.8 billion a year earlier. In fact, this is a 39% 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. The upstream earnings included a $2 billion charge hammering earnings. Chemical production was strong although chemical earnings of $872 million were $91 million lower than last year.
Continued strong production despite the cutting of labor and operational expenses is a sign of strength. But the fact is that the company has been slashing expenses. Are we reaching a point where the cutting has gone too far? The company whiffed on upstream expectations, and volumes are down. Despite the production still being somewhat strong, it was not enough to stem lower pricing. Revenues were light in the quarter but did rise as a whole in 2016 versus 2015. They came in at $61 billion versus 59.8, but fanned on estimates by $1.3 billion. While these numbers are key, the sector is, of course, still struggling. What the company has been forced was cut spending and expenses at all costs.
As I have said before trimming the fat is long past done. This has been a recurring theme throughout the sector. Exxon is trying to cut spending without damaging the vitality of the business. It has been difficult, but necessary, not just for this name, but all names in the sector. I think the company has been very successful. The decline in capital and exploration expenditures is indicative. Worldwide, they were $4.8 billion, down 35% from Q4 2015, while, at the same time, the company is still churning out relatively strong production.
One key metric that we must watch is cash flow. First, let me say that cash flow from operations and asset sales was $9.5 billion, and this to me is very strong, and is up $1.1 billion from Q3 2016. There were asset sales of $2.1 billion which more than covered dividends and property expenses. Cash flows were also up versus the year ago period. 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 Q4 2016 via dividends. What is more is that despite the terrible operating environment, dividends have been raised versus last year.
Bottom line? The company has trimmed the fat and is further continuing to be surgical with expenses. It is selling off assets to raise cash. Although expenses are down heavily, production remains strong, albeit reduced from years past. 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, and this will eventually impact the demand and supply curve. This is especially true of OPEC makes cuts. Oil and gas aren't going anywhere. With that reality, buy XOM, a quality company, when the price declines to 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.