Exxon Punished After Impressive Earnings

Summary

• Exxon's second-quarter earnings results help confirm that the previous quarter’s extension into profitability was not simply a one-time event.
• However, share prices were met with strong selling pressure following the earnings event risk and we think the market might be creating a new buying opportunity following these declines.
• Given the bear market’s incongruous reactions following the release of quarterly earnings, shares of Exxon Mobil are looking particularly attractive with a stable 6.04% dividend yield.

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Exxon Mobil (NYSE:XOM) saw profitability for the second quarter in a row after the energy giant reported an EPS figure of $1.10 and revenues of $67.74 billion for the second-quarter period. Excluding items, Exxon reported EPS of $0.65 and revenues of $59.15 billion for the period. From the report, we can see that clear improvements in oil demand have prompted continued trends higher in the market prices of traditional energy products and these bullish trends largely support our bullish outlook on XOM going forward. Given the market's incongruous reactions following the release of quarterly earnings, we think that shares of Exxon Mobil are looking particularly attractive with a stable 6.04% dividend yield in what is still a low-interest rate environment for income investors.

Source: Exxon Earnings Release

Since we issued our buy rating on XOM in November 2020, Exxon shares are trading higher by nearly +54% (a total return of +58.8% when the stock's attractive dividend yield is included). Even with the recent declines we're seen in the oil majors, these trading results more than double the total returns of the S&P 500 during the same period of time.

Ultimately, we expect Exxon's bullish stock performances to continue once the current downside-corrective move has run its course and recent declines in share prices can be viewed as a potential buying opportunity for investors with a specialized focus on generating income over time.

Chart Analysis: The Income Machine

Essentially, we think that Exxon's outperformance on the top-line and bottom-line figures suggests that the broader recovery in energy markets has developed in ways that are more bullish than perhaps most analysts had initially anticipated. Exxon's EPS figure beat Wall Street's estimates by more than 11% in its most recent release and the company's Q2 earnings results help confirm that the previous quarter's extension into profitability was not simply a one-time event. As Exxon CEO Darren Woods explained:

Positive momentum continued during the second quarter across all of our businesses as the global economic recovery increased demand for our products…We're realizing significant benefits from an improved cost structure, solid operating performance and low-cost-of-supply investments that, together, are generating attractive returns and strong cash flow to fund our capital program, pay the dividend and reduce debt. This was particularly true for our Chemical business that delivered their best quarter in company history.

In our efforts to support society's energy transition goals, our Low Carbon Solutions business made progress in identifying new opportunities and in establishing new partnerships in carbon capture and storage, hydrogen and low-emission fuels.

Of course, these comments are telling for a number of different reasons and the additional operational messages relating to the company's Low Carbon Solutions business and its "social energy transition goals" will almost certainly catch the attention of many investors.

Source: Exxon Earnings Release

However, what investors should be focused on is the fact that the company has shown clear evidence of an impressive recovery relative to the Exxon's expected cash flow position just a short time earlier (for example, back when options markets were even pricing-in the strong possibility of a dividend cut for the stock). Exxon reduced its debt levels by $2.7 billion in the second quarter and this means that the company has now cut its debt levels by an incredible $7 billion since the end of last year.

Source: Simply Wall Street

As we can see in the chart above, Exxon has actually experienced a dramatic recovery in its earnings outlook and this should be viewed as an encouraging measure of safety for investors considering XOM shares as a potential addition to long-term dividend portfolios.

For a comparative perspective on the true extent of the current turnaround, investors must remember that the destruction of energy demand that came as a result of the coronavirus pandemic led to quarterly losses of -$0.70 per share (adjusted) on revenues of $32.6 billion for Exxon during the Q2 2020 period. However, the latest earnings performances show that Exxon Mobil has made significant progress in the quarters that followed - and it should now be relatively clear that the stock has managed to maintain its value prospects for income investors following what was an incredibly turbulent period in the global energy markets.

Source: Simply Wall Street

For income investors, the security of the dividend itself is likely to be the most important factor in the portfolio decision making process. In many cases, an elevated dividend yield should be viewed as an early warning signal that potentially indicates extended declines in share prices.

However, Exxon's clear reversal from the 2020 price lows shows that these types of conditions are no longer in place for XOM shareholders and that extended declines in the stock price appears to be an unlikely outcome given that bullish trends might continue to march forward in oil markets during the remainder of the year in 2021.

Of course, some income investors might even argue that share price considerations only play a limited role in considerations of a retirement portfolio. But it has always been our view that extended declines in the share price of individual dividend stocks can create unnecessary difficulties for investors focused on total returns and income generation.

Ultimately, this is why entry levels and market valuations actually matter a great deal. Exxon currently trades with a price/book valuation of 1.6x, which is relatively cheap when compared to the oil and gas industry - and far more attractive than what is seen in the U.S. stock market as a whole. As Americans continue to see higher prices at the pump, well-positioned companies like Exxon Mobil have the potential to see continued outperformance in 2021.

Overall, Exxon's total debt levels are sufficiently covered by the company's operating cash flow and we think that the stock's excellent dividend looks much more secure now than it might have appeared near the end of last year. As one of the market's best dividend payers, income investors stand to benefit in the event that price trends in traditional energy markets remain pointed in the bullish direction. After falling sharply from recent highs near $65 per share, we think that XOM remains attractive as a long-term dividend payer that is capable of moving higher in the current market environment and we would need to see evidence of sustained declines in oil prices in order to reverse the outlook.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of XOM either through stock ownership, options, or other derivatives. 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.