For shareholders of major integrated oil stock Exxon Mobil (XOM), the hope is that the firm can build upon its recent earnings and production successes in the previous quarters. And like we’ve said, “As goes XOM & the majors, so does the energy industry.”
However, unlike much of the energy complex, Exxon and XOM stock are facing unique situation this quarter. Namely the company’s involvement in Russia.
A few years ago, XOM took a gamble by investing in Russia’s Arctic frontier. That gamble was set to pay off big time for the energy firm. Now with recent events happening — you, know the whole Ukrainian invasion thing — that gamble looks like it won’t be such a slam dunk for investors.
For Exxon and XOM stock, the question is whether or not the Russian Bear will maul earnings — and by how much.
XOM Earnings Preview
The tale for one of the world’s largest energy companies has been about finding and generating increased production. After the massive — and perhaps wrong-sided buy of XTO, Exxon was left with mostly natural gas production. However, Exxon seemed to have gotten a break on that front the last couple of quarters as the firm’s higher-priced “oil cut” has been rising. New moves into several oil-producing shales and offshore projects have turned the tide. More and more of these oil & liquids-based projects are scheduled to begin coming online over the next few quarters.
One of the biggest projects was a very un-Exxon-like move in Russia’s Kara Sea and its deepwater. It was set to drill the most expensive oil well this fall with partner Rosneft (RNFTF). But with Russia invading the Ukraine and resulting sanctions being placed on the country, analysts now estimate that the gamble may not pay off. At least not in the near term.
Costs due to the sanctions could zap earnings at the major integrated energy stock. Earnings estimates for XOM have been traveling downwards. According to FactSet, Wall Street now expects Exxon to earn $1.86 per share — about 6 cents less than previous estimates made three months ago. Analysts are also looking for XOM’s revenue to decrease by about 17% year-over-year — to reach just $105.54 billion for the quarter. A year ago, that amount was around $127 billion.
Aside from Exxon’s Russian woes, a recent concession agreement expiration could hurt production for the quarter. For the last 75 years, XOM was one of the chief producers in Abu Dhabi’s latest and oldest oil fields. However, the contract — which was signed around World War II has recently expired. Until a new deal is reached, Exxon and other major’s operating in the region will not be able to pump any “equity” oil or book reserves from these fields.
XOM’s first quarter already showed a lower daily production rate due the contract expiring. Analysts expect a similar decline in production for this quarter, and other majors like BP (BP) have already announced a drop from the region.
Positives for XOM’s quarter will include a higher selling price for its wares. Both oil and natural gas prices have risen over the last few months — ironically from the ongoing issues in Russia. Over the last few months, Brent-tied crude has rallied by 7%, while natural gas has increased by about 15%. Those should help eliminate some of the negatives for Exxon.
A Mixed Bag For XOM Stock
For shareholders of XOM stock, the quarter should be a mixed bag. Both the positives and negatives should basically balance each other out, and analysts are expecting a very, very slight earnings meet or beat. The key will be just how much Russia has affected the integrated giant’s current and future earnings. Exxon has already spent a pretty penny in the region, so any rising costs or issues could be a real drain on future earnings and profits.
With that in mind, the question for investors now is: Should they buy or add more XOM stock to their holdings?
Lower earnings estimates come with lower share price targets for XOM stock. Most of current analysts’ targets for Exxon are in the range of $100 to $105 per share. That’s basically, right where we are today. It’ll take one serious earnings beat to move share above that number. And given some of the issues facing XOM in the near term, that might not happen.
Perhaps the best strategy going into XOM’s earnings report would be to keep some powder dry and snag shares if they drift lower due to issues in Russia.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.