Exxon Mobil: This Engine Needs Some Extra Oil

About: Exxon Mobil Corporation (XOM), Includes: BP, CVX, EQNR, RDS.A, RDS.B, TOT
by: Fun Trading

Total revenues came at $69.09 billion, down 6% compared to the second quarter last year and up 8.6% sequentially. Earnings were $3.1 billion in the quarter or $0.73 per share.

Combining oil and gas production, Exxon Mobil produced 3,909K Boep/d this second quarter, up 7.2% year over year but down slightly sequentially. Liquids represented 2,389K Bop/d or 61.1%.

Exxon Mobil is an excellent long-term investment assuming an appropriated trading/investing strategy which includes some short-term trading.

SBM Offshore is converting the very large crude carrier Tina as an FPSO for Exxon Mobil's Liza development offshore Guyana. Source: Exxon Mobil Guyana.

Investment Thesis

The US-based Exxon Mobil (XOM) is one of the best "first-class" oil supermajors with about $300 billion in market capitalization. As it is common in this segment, the company pays a secure dividend yield of over 4%, and it makes sense to hold XOM in your long-term portfolio.

The company is part of my "six oil majors" group which includes Royal Dutch Shell (RDS.A) (RDS.B), BP Plc (BP), Equinor (EQNR), TOTAL S.A. (TOT), and Chevron (CVX) that I cover on Seeking Alpha regularly.

Please read my articles about the 2Q '19 results now published (Exxon Mobil was the last). Click here to get my articles published.

Below are the quarterly revenues and net income for the 2Q'19.

The company's upstream production is active worldwide (see chart below) with an output of 3,909K Boep/d in the second quarter of 2019:

Exxon Mobil is an "integrated oil" which owns meaningful onshore (e.g., Permian) and offshore projects (e.g., Guyana, Brazil) that is a guarantee of constant production for years to come. Besides the Upstream segment, the company is involved with two smaller sections in revenue size called the downstream and chemical.

This advantageous position allows the company to divest non-core assets more efficiently and enhance the overall performance and cash flow level.

The only real uncertainty is where are oil prices heading in 2019?

Investing in the oil sector is not a simple assignment because of the highly volatile nature of the industry. Investors will have to understand that Exxon Mobil is not about a few quarters or even a few years. It is a company that you virtually marry and keep in spite of the ups and downs.

When you invest in such a reliable company, it is essential to look at the underlying strength of the company for the next five to ten years before totally committing.

While XOM is a sound long-term investment, I believe it is quite essential to trade short term about 30% of your portfolio using key events to add or reduce your position. Technical analysis can help you with this task.

Neil A. Hansen, VP of Investor relation, said in the 2Q '19 conference call:

We reached final investment decisions for nine major strategic projects in just the first six months of the year including projects from all three business lines. Offshore exploration success continued with four significant deepwater discoveries; three in Guyana and one in Cyprus and we achieved key milestones in the development of two of our LNG growth projects in Papua New Guinea and Mozambique

In the Downstream and Chemical businesses, recent projects startups in North America and Europe are already making a positive contribution to results. These projects are accretive to earnings even in the current margin environment demonstrating the market resiliency we envisioned when making these investments.

Exxon Mobil - 2Q '19 Financial Table: The Raw Numbers

Exxon Mobil 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19
Revenues in $ billion 65.31 65.44 71.46 74.19 68.25 61.65 67.49
Total Revenues and other income in $ Billion 66.52 68.21 73.50 76.61 71.90 63.63 69.09
Net Income in $ Billion 8.38 4.65 3.95 6.24 6.00 2.35 3.13
EBITDA $ Billion 9.05 11.91 11.25 13.94 13.36 9.04 9.48
EPS diluted in $/share 1.97 1.09 0.92 1.46 1.41 0.55 0.73
Cash from operating activities in $ Billion 7.41 8.52 7.78 11.11 8.61 8.34 5.95
Capital Expenditures in $ Billion 4.50 3.35 4.93 5.20 6.09 5.20 6.17
Free Cash Flow in $ Billion 2.91 5.17 2.85 5.90 2.51 3.14 -0.23
Total Cash $ Billion 3.2 4.1 3.4 5.7 3.0 4.6 4.2
Total Debt in $ Billion 41.0 40.6 41.2 40.0 37.8 40.8 45.2
Dividend per share in $ 0.77 0.82 0.82 0.82 0.82 0.87 0.87
Shares outstanding (diluted) in Billion 4.27 4.27 4.27 4.27 4.27 4.27 4.27
Oil Production 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19
Oil Equivalent Production in K Boep/d 3,991 3,889 3,647 3,786 4,010 3,981 3,909
US Production in K Boep/d - - - 980 1,013 1,052 1,129
Permian Production in K Boep/d - - - 167 190 226 274
US Quarterly average Brent Eq. ($/b) 54.12 60.07 64.87 64.06 54.50 53.30 57.95
US Quarterly average NG ($/Kcf) 2.70 2.91 2.57 2.75 3.64 2.93 2.22

Sources: Company filing 10-Q and Morningstar

Trends and Charts: Revenues, Earnings Details, Free Cash Flow, and Upstream Production

1 - Quarterly revenues and other income

Revenues and other income came at $69.09 billion, down 6% compared to the second quarter last year and up 8.6% sequentially. Earnings were $3.1 billion in the quarter or $0.73 per share, including $0.12 per share impact from a tax rate change in Alberta, Canada.

2 - Free Cash Flow (not including divestitures)

I regularly mention the free cash flow for Exxon Mobil as a crucial financial indicator. FCF yearly ("TTM") represents $11.32 billion (not including divestitures). The second quarter was a loss of $0.23 billion (according to Morningstar/YCharts).

Analyzing free cash flow is a crucial exercise from a long-term investment perspective. The bottom line is that the free cash flow must cover dividend payout and share buybacks. The oil majors are paying a very generous dividend going from 4.05% to 6.71% as you can see below:

The dividend is now $3.48 per share annually or a yield of 4.95%. Based on 4.271 billion shares outstanding diluted, it is a cost of ~$14.9 billion per year, which is higher than the free cash flow ("TTM").

Thus, Exxon Mobil is not passing the FCF test.

Below, you will find XOM quarterly free cash flow chart compared to its peers:

XOM and EQNR are the only two oil supermajors with a negative FCF for 2Q '19.

Note: The dividend yield indicated above is a "gross yield" and can be lower for the US investors, especially for Equinor which takes about 28% directly (including fee) out of the dividend payout and TOT which takes about 12.8%, while BP, CVX, RDS.B, and XOM are not.

3 - Oil production in K Boep/d and different earnings details

A - Upstream segment

Combining oil and gas production, Exxon Mobil produced 3,909K Boep/d this second quarter, up 7.2% year over year but down slightly sequentially. Liquids represented 2,389K Bop/d or 61.1% of the total production.

Let's analyze the production in the US and especially in the prolific Permian Basin for the last four quarters.

Total US production represented 28.9% of the total output in 2Q '19. The Permian production was 274K Boep/d or an increase of 21% sequentially (see chart below):

Source: XOM Presentation

In the chart below, I have indicated XOM Upstream production 2Q '19 compared to its peers and the "American" share of oil and gas production:

Note: the US production is not including Canada for CVX and XOM. However, TOT and EQNR production cover more than the US and are not big players in this region.

B - For the Downstream segment, earnings were up significantly from 1Q '19.

C - For the Chemical segment, earnings decreased sequentially to $188 million from $518 million in 1Q '19.

D - Production in the Permian Basin continues to increase towards 1M Boep/d by 2024. Production is 274K Boep/d for 2Q '19.

Source: XOM Presentation

Neil Chapman said in the conference call:

our unconventional Permian and Bakken volumes are growing in line with plan. We increased our Permian volumes by 20% in the second quarter, which is up 90% versus the second quarter last year. We're now at 51 rigs and 12 frac crews in the Permian and we brought 67 wells to sales in the second quarter.

E - Guyana oil production is on schedule.

Exxon Mobil is on schedule to start production in Guyana during the first quarter of 2020 with an initial output of 200k Boep/d.

Our first FPSO Liza Destiny is en route to Guyana. We started the schedule for the first quarter of next year, but I'm optimistic we'll do better than that. We completed the FID on the second FPSO at Liza-2, which is close to double the size of Liza-1 in the second quarter and that will start up in 2022. The startup of the third FPSO for the Payara and Pacora development remains on schedule for 2023 startup. (Conference call)

F - Recent news: Exxon Mobil agrees $4 billion divestiture of its Norway oil and gas assets (not yet confirmed by the company).

According to Reuters, Exxon Mobil will sell its minority stakes in more than 20 fields, operated by Equinor and Royal Dutch Shell to Var Energi for $4 billion. The minority stakes produced about 170k Boepd in 2017 with 530 M Boe in reserve.

Exxon Mobil is also contemplating selling its assets in the British North Sea.

G - Third-quarter of 2019 outlook

4 - Net Debt is $36.2 billion in 2Q '19

Exxon Mobil's net debt is now $36.2 billion. Net debt to EBITDA is now 0.9x, which is still impressive.

XOM net debt compared to its peers:

Conclusion and Technical Analysis

Exxon Mobil reported its second-quarter results on August 2, 2019. While the company managed to top analysts' expectation, the stock experienced a severe selloff. It was not a surprise, so.

Oil prices have been struggling, and both downstream and chemical earnings were down sharply from a year ago due to downtime, maintenance, and lower margins.

However, Exxon owns a promising position in the Permian Basin and plans to increase production from 274K Boep/d in 2Q'19 to about 1 M Boep/d in 2024. The company is a little behind to its main US competitor, Chevron Corp., which is producing 421k Boep/d but this will disappear overtime at peak production.

One exciting upstream offshore production that will make a big difference for Exxon Mobil is, of course, the Liza I in Guyana which will start producing early next year.

Yes, if we look at the company from a long-term investors' perspective, we see a struggling stock which has not performed particularly well for the past few years.

The cyclicality of the oil business is somewhat preventing XOM to "reach the stars" or "drop into oblivion," and it behaves as a perfect cyclical stock with an extra touch of weakness compared to its peers. No big deal.

However, for savvy investors, this is pure gold because the stock is trading in a predictable long-term range and pays a steady dividend that we can consider safe. The only task remaining is to apply a trading/investing strategy that will maximize the gain, and it is quite an easy assignment for such stock of this caliber.

All you need is to set the range - let's suppose a $60-90 - and use about 30% of your position to trade short term the volatility of the oil sector, using a straightforward interpretation of the chart called Technical Analysis.

You do not need to be drawn into the complicated fundamentals (remember analysts have a poor track record when it comes to trading the market) and only a dozen trades a year can reward you, well over 15% return on your investment with a possible exit, with 20% extra-profit, every five years.

The primary issue is that we, shareholders, are not in charge or control of the company, and we use the stock as a vehicle to profit, period. We are not supposed to manage the company, and we could not care less. As long as the business model is robust and the company balance sheet is in order, then we are happy. Oil and energy are the main engine of this modern world and will stay that way long after we will be all dead.

Then, let's focus on what is essential.

Technical Analysis

XOM is forming a descending channel pattern not entirely described by Finwiz. Line resistance is now at $74, and line support is about $64.50.

To visualize the line support, you draw a parallel from the June low which one confirmation in mid-August. Generally, descending channel patterns are considered bearish, which means that support at $64.50 is likely to be retested shortly.

Short term, any sharp uptick should be an opportunity to take some profit off the table that will be used at support. One intermediate resistance is about $72, and I recommend selling about 15% of your position at this level and another 15% at $74 if the stock continues its ascent.

On the negative side, I recommend accumulating starting at $67.85 to eventually $64.50.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Disclosure: I am/we are long XOM. 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.

Additional disclosure: I trade the stock frequently