What To Expect From Exxon Mobil In 2023

Summary

• Exxon Mobil Corporation's Q1 2023 financial results show a deterioration from the previous quarter, with revenue down 12% and share price slightly dropping.
• The decline in oil prices and increased competition in the energy sector may lead to slower growth in dividend payouts or the need to borrow to pay them.
• The article initiates coverage of Exxon Mobil with a "hold" rating for the next 12 months, expecting the share price to drop to $96 per share in the next two months.

stefanamer/iStock via Getty Images

Since the publication of my bearish article “Is It Worth Investing In Oil And Gas Companies In 2023,” WTI crude and Brent futures have fallen by more than 15%. Moreover, the price of the Energy Select Sector SPDR® Fund ETF (XLE), one of the largest ETFs in the energy sector and which includes Exxon Mobil Corporation (NYSE:XOM), has fallen more than 7%, despite the positive performance during that time of the S&P 500 Index (SP500).

Nathan Aisenstadt - Seeking Alpha

On April 28, 2023, Exxon Mobil, one of the world's largest oil and gas companies, published financial results for the first three months of 2023, showing their deterioration from quarter to quarter. At the same time, since the beginning of 2023, Exxon Mobil's share price has slightly dropped, which is a good result, given the decline in energy prices and increased competition from Shell plc (SHEL) and Chevron Corporation (CVX).

Author's elaboration, based on Seeking Alpha

We initiate our coverage of Exxon Mobil with a "hold" rating for the next 12 months.

Exxon Mobil's Financial Position

Exxon Mobil's revenue for the first three months of 2023 was $84.18 billion, down 12% from the previous quarter and 4.3% from the first quarter of 2022. Despite substantially higher energy prices in recent years, the company's actual revenue only beat consensus estimates six times out of nine, with a massive miss in Q1 2023, indicating Wall Street's expectations of the dividend aristocrat's prospects are too high.

Author's elaboration, based on Seeking Alpha

The consensus estimate for Exxon Mobil's revenue for the 2nd quarter of 2023 is $83.55-131.81 billion, up 15% from analysts' expectations for the first three months of 2023. We estimate that this is too high an expectation, and according to our model, the company's revenue will be $81.5 billion in the second quarter of 2023.

Natural gas is one of Exxon Mobil's key revenue generators, and sales were 8,016 Mcfd in Q1 2023, down 5.2% year-over-year, one of the lowest since the introduction of COVID-19 vaccines into the market that a significant contribution to the recovery of economic activity in the U.S., Europe, and other developed countries.

Author's elaboration, based on quarterly securities reports

As of May 31, 2023, the price of natural gas in the U.S. is $2,304 per MMBTU, and at the same time, it continues to remain at extremely low-price levels due to its high reserves by the current time of the year and expected high temperatures in the summer. The National Oceanic and Atmospheric Administration (NOAA) forecast that much of the U.S. will experience unusually high temperatures in the coming summer, likely making it one of the hottest years.

National Oceanic and Atmospheric Administration

At the moment, natural gas prices are below levels when the panic around COVID-19 only grew, and the U.S. government was beginning to impose severe restrictive measures to curb the virus. At the same time, from August 2020 to December 2020, the price of Exxon Mobil shares was $32-$42, which is significantly lower than its current prices, indicating a discrepancy between Mr. Market's assessments of the company's prospects.

In the second half of May 2023, European natural gas prices fell below 25 euros per MWh, falling by more than 92% from their peak and thus reaching early 2021 levels.

Investing.com

The main reasons for the decline in natural gas prices in Europe, which will ultimately continue to harm Exxon Mobil's upstream revenue, are a hot winter and the preservation of natural gas reserves at a high level due to unprecedented supplies of liquefied natural gas. Moreover, we do not expect the Ukraine-Russia conflict and the blown-up Nord Stream 1 will lead to significant problems with the energy source for European countries in the coming winter. Since the start of the replenishment season, natural gas storage facilities in the European Union have been filled at 68.04%, according to the

Gas Infrastructure Europe (GIE), a significant increase from previous years.

Author's elaboration, based on Gas Infrastructure Europe (GIE)

At the same time, in most countries of the region, storage facilities are even more filled, which, taking into account the concluded long-term contracts with suppliers from the Middle East and the USA, will continue to put downward pressure on natural gas prices. We believe that the significant price cuts give European leaders confidence that their countries can easily do without Russian natural gas supplies, on which they were heavily dependent until February 24, 2022, and focus on switching to wind and solar energy.

Author's elaboration, based on Gas Infrastructure Europe (GIE)

The EIA estimates that the total working natural gas in U.S. storage was 2,336 billion cubic feet, up 96 billion cubic feet from the previous week. At the same time, current reserves exceed the volumes shown relative to both 2022 and the five-year average.

U.S. Energy Information Administration (EIA)

Exxon Mobil's gross margin was 34.14% in Q1 2023, reaching some of the highest levels in recent years but significantly down from the previous quarter. We predict that by 2023 Exxon Mobil's gross margin will reach 32%, and by 2024 this value will decrease to 29.5% due to lower oil and gas realized prices and rising production and manufacturing expenses. This financial indicator is not only lower than that of the energy sector, but it also lags behind such main competitors as Chevron Corporation (CVX), Equinor ASA (EQNR), and TotalEnergies SE (TTE), which is another factor that discourages investors from choosing Exxon Mobil as a long-term investment during a period of declining inflation and rising investment in technology stocks.

Exxon Mobil's net income margin in Q1 2023 was 13.58%, up slightly QoQ but showing a more significant increase compared to the first quarter of 2022. The company's earnings per share (EPS) for the first three months of 2023 was $2.83, down 16.8% from Q4 2022, but it has beaten analyst consensus estimates since 2021 in eight of the last nine quarters.

However, Exxon Mobil's Q2 EPS is expected to be in the $1.88-$2.91 range, down 11.2% from the Q1 2023 consensus estimate. At the same time, the Non-GAAP P/E (TTM) is 7.08x, and the Non-GAAP P/E (FWD) is 10.5x, which is 16.26% and 22.96% respectively higher than the average for the energy sector, which is one of the factors indicating that the company is overvalued in the current period of China's economic recovery after 2022 when the zero-COVID policy caused colossal damage to the country.

Author's elaboration, based on Seeking Alpha

We believe that Exxon Mobil's beating EPS is primarily due to the share repurchase program. In the first three months of 2023, Exxon Mobil bought back its shares for about $4.34 billion, while CEO Darren Woods still has the option to buy back the company's shares for $30.7 billion until 2024.

Author's elaboration, based on Seeking Alpha

Despite the impressive numbers, the continued decline in oil prices should negatively impact Exxon Mobil's free cash flow, preventing the company's management from actively resorting to the program. As a result, Darren Woods's ability to support Exxon Mobil over $100 per share will be limited, which could make the company more vulnerable to short sellers.

At the end of the first quarter of 2023, Exxon Mobil's total debt was about $41.45 billion, down $11.58 billion from the end of 2021. However, despite the sharp drop in EBITDA in recent quarters, the total debt/EBITDA ratio has fallen from 1.15x to a record low for Exxon Mobil of 0.44x.

Author's elaboration, based on Seeking Alpha

Given the bonds' interest rates and maturity dates, we don't expect Exxon Mobil to have any problems servicing or redeeming them. However, in 2020, we saw that the company's management began to borrow money, including for the payment of dividends, to maintain the status of a dividend aristocrat.

On October 27, 2022, Exxon Mobil's management announced an increase in its quarterly dividend payout from $0.87 to $0.91 per share. Despite a high dividend yield of 3.47%, we believe that the ongoing collapse in hydrocarbon prices could either lead to slower growth in dividend payouts in future years or the need to borrow to pay them. Thus, levered free cash flow (LFCF) was about $8.75 billion in the 1st quarter of 2023, having decreased by 12.1% compared to the previous year and 23.6% compared with the last quarter.

Author's elaboration, based on Seeking Alpha

At the same time, Exxon Mobil distributed $3.7 billion in dividends to shareholders in the first quarter of 2023, which is about 42.3% of LFCF, and this share will only grow in the coming quarters, including due to lower refining margins. Ultimately, this brings Exxon Mobil's management closer to the red line, after which Darren Woods must adjust his dividend policy to reduce financial risks.

Conclusion

On April 28, 2023, Exxon Mobil Corporation, one of the world's largest oil and gas companies, published financial results for the first three months of 2023, showing their deterioration from quarter to quarter. At the same time, since the beginning of 2023, Exxon Mobil's share price has shown a slight drop, which is a good result, given the decline in energy prices and increased competition in the energy sector. This was mainly due to Darren Woods's continued active use of the share repurchase program, helping to keep Exxon Mobil above $100 per share.

Due to the slower pace of Russia's oil production cuts, weak economic data on China, a strengthening dollar during the current period of macroeconomic turmoil, growth in U.S. petroleum and other liquids production, and a high rate of people switching from internal combustion engines vehicles to electric vehicles, we expect the price of WTI crude and Brent futures to continue to decline in the next three quarters.

As a result, we expect Exxon Mobil Corporation's share price to drop to $96 per share in the next two months before reaching a strong support zone. We initiate our coverage of Exxon Mobil Corporation stock with a "hold" rating for the next 12 months.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

This article may not take into account all the risks and catalysts for the stocks described in it. Any part of this analytical article is provided for informational purposes only, does not constitute an individual investment recommendation, investment idea, advice, offer to buy or sell securities, or other financial instruments. The completeness and accuracy of the information in the analytical article are not guaranteed. If any fundamental criteria or events change in the future, I do not assume any obligation to update this article.

Comments

[Nathan Aisenstadt]

Greetings.

Thank you for reading our article and following us. We appreciate it. As promised, we began to publish an analysis of the companies from the list. We will post articles about AT&T and Altria Group in the next two days.

Thank you all again.

[CrackExpert]

Get that HONEY and make me MONEY!

[PT Larry]

Thanks for the article.

[Jdeboer87]

I agree lower oil prices will impact the share price. But to suggest the company may need to borrow to pay its dividend is a bit over the top. Of course if the oil prices collapse again that will be the result. But the company’s balance sheet is so much stronger now and they have great investment opportunities. So maybe your article should be if oil prices collapse then Exxon will need to borrow to pay its dividend. But that would be the case for 90 percent of the energy industry.

[Sourdough98]

Futures are in backwardization with price support going out 10 years near the $60 dollar range. That is good enough support to continue shareholder friendly capital allocation going forward. XOM is arguably the best in the business. Whether they raise dividends through buy backs or cash payments, I would trust management to make the right decision going forward.

[Seeburto]

Not near corrected enough to be interesting. But a good company.

[BuffaloBell]

XOM is a long-term investment. Oil and gas are cyclical and it is pointless to forecast future economics based on the past. We do know, however, that demand and supply of oil and gas is expected to increase going forward and XOM is well positioned with a strong balance sheet. They are the efficient provider with a breakeven of < $30 WTI. (I certainly am very happy with shares purchase in 2020 currently paying a 10% dividend yield.)

[rwg45]

Muted. Green True Believer.

[bet727]

No analyst worth his salt does quarter to quarter comparisons. No mention of XOM lower break even cost heading lower. Worthless article.

[pyrotechnic67]

@bet727 Oh, come now. I did think it was way too much "the sky is falling", but there were good points. Bottom line - expect XOM to be flat or a little down for the rest of the year. In the meantime, enjoy that 3+% yield.

[secorewb]

Good rear view mirror macro analysis.
Do you believe volume increases in the next few years are factored in? Or do you only go out one year?

[gold_alex]

Do you think it's worth buying a Tesla then?

[ALEX_19]

@gold_alex Is Tesla doing well? Their net income is declining.

[JTFLANAGA]

A guy a lot brighter than me told me years ago "if you make a forecast, be sure to put a wide enough range on it to account for all the uncertainties.
Your range is somewhat narrow: Price will be in the range of $96 to $96.
Given developments in the Ukraine war and the U.S., China and world-wide economies - and the outcome of the coming OPEC meeting - among other uncertainties - are you comfortable with that range?

[ALEX_19]

@JTFLANAGA Why do you think the OPEC meeting is important?

[CyclePilot]

@ALEX_19 likely more output cuts coming. Saudis want $80 oil.

[TheOldHand]

@ALEX_19 Huh? Surely you know?

[Seeburto]

Thanks for article. I expect oil stocks to fall another 10%, which aligns nicely with your analysis. At that point I begin nibbling. Although they could fall further, that would a decent entry point in non-extraordinary times.

[Nathan Aisenstadt]

@Seeburto Greetings.

Thank you for sharing your thoughts. I appreciate it.

[ALEX_19]

Thanks for the great article. I think that few people are already investing in oil and gas companies in 2023.

[Nathan Aisenstadt]

@ALEX_19 Greetings.

Thanks for the comment.

[jthj]

@ALEX_19 Buffett sure likes OXY!

[bet727]

@ALEX_19 Ignorance!

[ndardick]

Good article, as always. And.....I hope you are sitting down....I have nothing to add!!

[Nathan Aisenstadt]

@ndardick Greetings.

It's great to hear pleasant words from you. And as usual, I agree with you.

[scout2012]

An analyst should not let their belief in a political objective, like Climate Takedown, interfere with their analysis.

[Nathan Aisenstadt]

@scout2012 Greetings.

Thanks for your thoughts.

[Rick Rocket]

Wont take much to see the price of oil reverse. XOM target price 115 by year's end.

[Nathan Aisenstadt]

@Rick Rocket Greetings.

Thank you for your comment and your price target for Exxon Mobil.