In my earlier article in 2018, I had asked new investors to stay away from buying Exxon Mobil (XOM). I had stated that Exxon Mobil’s stock price was highly dependent on oil price, and this was one of the major reasons why it had underperformed when compared to other energy stocks like (BP) and Royal Dutch Shell (RDS.A). Exxon Mobil was then trading at $74.61, and ended its 2018 run at $68.19. However, on February 1, 2019, Exxon Mobil surprised its investors and analysts by releasing its 4Q18 earnings. The stock witnessed a jump of more than 3.4% after its 4Q18 results were announced. Let us analyse these results and its impact on stock price. Is this the right time for new investors to buy Exxon?
4Q18 earnings were supported by higher production
Exxon Mobil reported an estimated 2018 earnings of $20.8 billion with an earnings per share of 4.88 assuming dilution, a growth of 6% when compared to 2017. Its 4Q18 earnings stood at $6 billion with earnings of $1.41 per share. It must be noted that the reported earnings were way better than the market expectation of $1.08 per share.
Upstream Volumes 3Q18 Vs 4Q18
Image Source : Exxon Mobil News Presentation 4Q18
One of the key highlight of Exxon Mobil’s 4Q18 earnings update was the rise in Permian unconventional production, which went up by more than 90% when compared to 2017. Investors must note that Exxon Mobil plans to triple its Permian production to almost 600,000 oil equivalent barrels by year 2025. “Our geographic and competitive advantages in the Permian position the company for strong growth and long-term value creation. We can deliver profitable production at a range of prices, and we have logistics and technology advantages over our competitors,” said President of Exxon Mobil’s XTO Energy subsidiary Sara Ortwein.
Besides this, the company made a major discovery in Guyana where it claims to have discovered more than 5 billion barrels or oil and equivalents. Supported by higher oil production in 2018, Exxon Mobil’s Non-U.S upstream profit almost doubled from $6.73 billion to $12.34 billion during the same period.
Downstream Earnings 4Q17 Vs 4Q18
Looking at Exxon Mobil’s downstream business, the reported numbers were far less encouraging (when compared to upstream sector) as fuel margins went down due to weak gasoline demand during 4Q18.
Even its chemical margins went down in 4Q18 due to capacity additions and weak demand. In spite of weak downstream and chemical margins, Exxon Mobil reported a full year cash flow from operating activities of $36 billion, which was its highest since 2014.
Should new investors buy XOM?
Exxon Mobil’s stock performance is closely related to oil price volatility and has historically delivered a strong dividend yield. Although oil prices remained on the lower side during 4Q18, Exxon Mobil’s rising upstream volumes supported its overall financial growth. Last year, the company had outlined an "aggressive growth strategy" for doubling its cash flows and earnings from operations by year 2025, at 2018’s oil price levels. The plan was to increase its drilling activities and overall production through a number of growth initiatives in its upstream, downstream and chemical business.
With its latest financial results, it can be seen that Exxon Mobil's "aggressive growth strategy" is now beginning to take shape, and this factor will support XOM in the coming time. Although oil prices are likely to remain volatile in near future, new investors must buy and hold this stock for the long term without expecting any substantial short term capital gain. In my opinion Exxon Mobil's stock price will hover in the range of $74 to $78 in 2019.
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.