As we’ve already seen from a variety of energy stocks, the falling price for crude oil is starting to have its way with profits. From energy producers to oil service firms, the dramatic way crude oil has fallen — down about 50% in six months — is finally starting to come ahead in the energy sector.
And for many firms, more pain could be staring at them in the face.
But Exxon Mobil Corporation (NYSE:XOM) isn’t just an energy stock, it’s the energy stock. And as we’ve said before, its size and scope across all sectors has helped it fight back the tide of lower oil prices in previous bust cycles.
XOM is set to report fourth-quarter and full-year earnings this Monday. That report will be critical to setting the tone for not just Exxon stock, but the rest of the energy sector.
Here’s what to expect when Exxon releases its earnings.
Exxon Stock: Just OK Past Performance, Cloudy Outlook
When Exxon reports earnings this Monday before the bell, investors won’t necessarily be paying attention to the integrated giant’s actual earnings. Remember, the beginning of the quarter saw oil prices relatively high. It wasn’t until about halfway through the final three months of the year that OPEC made the surprising decision to keep production humming. That’s when oil really began to see its decline accelerate.
With that said, like earnings reports from Halliburton Company (NYSE:HAL) and Schlumberger Limited (NYSE:SLB), XOM will be all about the 2015 outlook and capital expenditure spending at the integrated giant. And that outlook could be pretty dour.
Like many of its rivals, analysts’ predict that Exxon will reduce its capital spending on many of its ambitious projects. So far, the average decrease is about 25% to 30% in the sector. Projects included forays into the Russian Arctic, deepwater drilling and attacking new shale formations.
In the last few earnings reports, these initiatives seem to be working. XOM managed to dramatically increase its oil production at time when prices where high.
Unfortunately, with oil now less than $50 per barrel, undertaking many of these projects doesn’t make much sense. Exxon Mobil CEO Rex Tillerson said in December that XOM can survive the downturn in oil prices even if oil is $40 per barrel. However, that’s for the firm’s more conventional assets.
To really frack or deepwater drill, you need a much higher price for crude.
Under that scenario, XOM is expected to see a dip in its production, rather than an increase. According to data provider FactSet, XOM should report production of 4.1 million barrels a day for the quarter.
That’s actually a decrease when looking at the fourth quarter of 2013. And some analysts predict that Exxon will continue to see production declines for the rest of 2015 and 2016 based on the new lower oil price environment.
Essentially, Exxon is going to be right back where it was in 2010 — struggling to make real gains in production.
Adding to the integrated energy giant’s headache is that the lower price per barrel for crude and natural gas will hurt margins on whatever it actually does produce. The rising dollar doesn’t help either. Both factors will begin to show up in Exxon’s latest earnings report.
Exxon is forecasted to report earnings of $1.34 a share for the fourth quarter — nearly a nearly 29% decrease from a year ago. Likewise, revenues at the behemoth are expected to drop by 21%. The firm is set to report $87.5 billion in revenue for the quarter.
Should You Buy Exxon Stock Ahead Of Earnings?
Over the last 12 months, Exxon stock has fallen about 7% and it’s down 5% this year. That drop has certainly made the integrated giant a tantalizing bargain for value hounds. Shares can currently be had for a cheap price-to-earnings ratio of 12. However, there are still a few more concerns to consider before pulling the trigger on XOM stock.
Namely, the dividend and juicy share buyback program at XOM.
Click to Enlarge Now, I am in no way going to suggesting that XOM cut or remove its dividend payout. That’s not going to happen as it’s still minting a ton of cash. The problem is, under the new oil price scenario, XOM isn’t minting as much as it was before. Over the last four years, XOM has managed to increase its payout by 100% and undergo one of the largest buyback programs in history.
For the latest payout, there was no dividend increase and recently the firm has started to dial down just how much Exxon stock it was buying back. This could continue as profits, margins and production drift lower. Cash flows at XOM won’t be as high as they were during the boom times.
In fact, analysts at Credit Suisse predict that total cash flows at Exxon will only be $7.44 and $10.11 in 2015 and 2016, respectively. That’s lower than the previous estimates and were made under the assumption that Brent averages $85 per barrel.
With prices for oil nowhere near that mark, even lowered cash flows estimates could be completely out of the ballpark.
The Bottom Line
At the end of the day, XOM is still the champion when it comes energy production. And if you were going to buy a single stock to get you through the next few years of cheap oil, Exxon would be it.
However, lower production, dwindling margins and smaller cash flows aren’t exactly awesome things. XOM’s latest earnings and CAPEX spending reports should highlight just how difficult things could get for the integrated giant.
New investors in the stock may want to wait before pulling the trigger on Exxon stock. There’s still some uncertainty.
As of this writing, Aaron Levitt was long the Vanguard Energy ETF (NYSEARCA:VDE) , which holds XOM, HAL and SLB.
