The latest results from Exxon Mobil Corporation (NYSE:XOM) show that even diversified oil majors with with massive refining operations have no place to hide from the collapse in the oil market.
With oil prices down by more than 50% since June — and 30% over the course of the most recent quarter — no one expected XOM to produce a happy earnings report.
But unlike so much of the rest of the energy sector, at least XOM’s refining business benefits from cheaper crude prices. That’s why if there’s any place to be looking for bargains among beaten-down oil stocks, diversified companies like XOM look like a much better bet than, say, an offshore drilling company.
And yet even XOM’s refining business was a drag on fourth-quarter earnings, hurt by higher-than-expected maintenance costs and weaker margins in the U.S. Indeed, operating earnings from the refining and marketing division fell by more than 50%. Even if that’s a one-off quarter of weakness in XOM’s refining operations, it sure managed to happen at a terrible time.
For the most recent quarter, XOM earnings fell 21% to $6.57 billion, or $1.56 per share, from $8.35 billion, or $1.91 per share, in last year’s fourth quarter.
True, earnings beat the Street estimate of $1.34 a share, according to a survey by Thomson Reuters, but that was due to a tax benefit and a favorable arbitration ruling for assets expropriated by the government in Venezuela. That’s hardly a high-quality earnings beat. After all, there was no growth to speak of, and tax benefits and arbitration wins aren’t sustainable.
Revenue, meanwhile, dropped to $87.28 billion from $110.86 billion a year ago, which was short of the Street estimate for revenue of $87.6 billion.
Is XOM a Bargain?
As disappointing as the contribution from refining and marketing may have been, it was XOM’s exploration and production business that really hurt the bottom line, as earnings there fell nearly 20% to $5.5 billion.
According to an analysis by Barclays investment bank cited by the Wall Street Journal, every $10 drop in crude prices costs XOM $2.84 billion in annual operating cash flow. Cash flow in the fourth quarter declined 36%.
No wonder XOM will pull back on its share repurchase program. For the first quarter, XON plans to spend $1 billion on buybacks, down from $3 billion in the most recent quarter. The dividend, however, remains safe. A 9.5% increase in the payout — marking the 14th straight year XOM has increased its quarterly dividend — remains on track, Exxon said.
Exxon stock is off 2% over the last 52 weeks, lagging the broader market by 15 percentage points. In some ways, that underperformance has XOM looking like a bargain. Shares go for less than one times sales, for example.
But with no signs of hope for the oil market on the horizon, Exxon stock looks doomed to lag for a while longer.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
