by Aaron Levitt | April 30, 2014 12:11 pm
Exxon Mobil (XOM) is about to report earnings, and the numbers put up by XOM stock May 1 will set the overall tone for things to come in the enegy sector.
As one of the largest producers of oil and natural gas, as go Exxon earnings, so goes much of the industry.
It has been middling year for Exxon Mobil stock, with XOM up about 13% in the last 12 months vs. about 16% for the S&P 500. As for earnings, three quarters’ worth of XOM reports have been a mixed bag of higher production/capex costs, lower profits and higher (albeit slightly) production.
That means the pressure is on XOM stock to put up a strong earnings performance.
Not to mention that, as one of most widely held stocks, Exxon earnings will matter to a host of investors who hold mutual funds in ETFs in one way or another, regardless of whether you directly hold Exxon Mobil stock.
So if your focus is on the XOM earnings report — and it should be — here are five things you’ll want to watch:
Exxon earnings are going to be lower this quarter overall. Despite recent gains in the pricing for Brent crude — thank the conflict in Russia/Ukraine for that — the average price for the European benchmark was more than 5% lower year-over-year during the first quarter. That lower average price basically means that Exxon was forced to sell its production at a cheaper amount and will negatively impact Exxon’s crude oil revenues.
Also hindering XOM stock will still be its struggling downstream and refining sector. While crack spreads have widened over the last few months, they still aren’t as juicy as a year ago. Exxon should see slightly better performance from its downstream sector, but investors shouldn’t expect miracles. All in all, analysts estimate that the energy firms refining sector will still put a crimp in Exxon’s earnings and in Exxon Mobil stock as a result.
At the end of the day, analysts expect XOM to report earnings of $1.88 per share. That’s an 11% decrease versus a year ago and will be the fourth quarter of lower earnings for the integrated giant. On the bright side, revenues are predicted to rise by 3.3% to reach $15.13 billion for the quarter.
At first blush it seems that Exxon went hard into natural gas production at just the wrong time. Its 2010 purchase of XTO for $35 billion was basically at the top of natural gas prices- at just over $15 per MMBtu. As fracking has taken hold, natural gas supplies continue to increase and prices for the fuel have dropped steadily. At one time, natural gas was poised to drop through the $1 per MMBtu mark.
All of that changed this past winter.
Freezing cold and persistent low temperatures have caused supplies of natural gas to dwindle to some of the lowest amounts in years. That’s also helped push prices for the fuel upwards. Spot prices Henry Hub natural gas have popped 45% on a year-over-year basis. And with XOM still a major natural gas producer, those higher prices for natural gas should help cushion its profits even though lower oil prices and refining margins have been weak.
It pays to be a diversified producer of energy.
Like many of the world’s largest energy firms, the last few years for XOM has been one of dwindling production. Finding large sources of oil & natural gas have been difficult to find- especially on the oil front. An in order to move to move the needle at XOM, those finds need to be pretty big.
For Exxon’s upcoming quarter, we should a build-up of new production capacity hitting the tape. Recently coming online was Exxon’s massive liquefied natural gas (LNG) facility in Papua New Guinea as well as additional production from its Kearl oil sands project in Canada with partner Imperial Oil (IMO). These two projects– — along with new wells in the Gulf of Mexico and production from its partnership in Russia — should add about 300,000 barrels per oil equivalent per day to Exxon’s production.
Longer term, these various projects should help XOM regain its production mojo and finally turn the tide of production decreases.
Another issue that could present itself during XOM’s latest earnings release is the fate of its Russian holdings. In retaliation for invading the Ukraine, the U.S. and EU has placed a series of sanctions on Russian interests and the latest round of these government sanctions could put the entire project in jeopardy.
The U.S. Treasury Department has essentially blacklisted Igor Sechin. Aside from being a top advisor to Russian government and the nation’s main energy mastermind, Sechin is also the CEO of stat-owned integrated oil giant Rosneft (OJSCY). That’s a big deal as XOM’s main partner in the nation is Rosneft and drilling in the Arctic was set to begin this year.
As the latest round of sanctions where announced, President Vladimir Putin basically said that the state would have to reevaluate energy deals with U.S. and European companies. Cutting ties if necessary. Aside from the potential $900 billion loss in future energy revenue from drilling in Russia, XOM could be out of some serious already spent CAPEX. Russia does have a history of nationalizing foreign assets and the Exxon has spent around $600 million in the nation to begin tackling its energy reserves.
Finally, investors should look at XOM’s cash balance when it releases earnings. As we said before, it’ll take some serious reserves to move the needle at the integrated giant. In order to do that, XOM may open up its wallet. Already, the firm has bought smaller shale and rivals in recent years, but it hasn’t made a huge purchase since XTO back in 2010.
With the recent CEO departure at British Gas (BRGYY) and Anadarko’s (APC) recent lawsuit win, both firms are said to be on the auction block. It’ll take a giant like XOM to do the deal. Any hint that XOM has an unusually large cash balance or bond sale announcement could mean that Exxon is ready to strike. As of last quarter, XOM had about $5 billion in cash on its balance sheet, but its hefty cash flows could support raising debt to purchase a larger rival.
For Exxon Mobil and XOM stock investors, its latest quarter should be another average report. Nothing too great, nothing too bad. But that’s exactly what one of the world’s biggest energy stocks should deliver. The key takeaways is that XOM may finally be seeing some much needed production gains on the oil front. That will be great news if oil prices can continue their march higher into the second quarter.
The real wildcard will be Russia and potentially a higher cash balance signaling a big buy is coming.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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