As they say in the oil patch, “so go the majors, so goes the rest of the energy sector.” And you can’t get any more major than integrated giant Exxon Mobil Corporation (NYSE:XOM).
Exxon Mobil, with its enviable asset base that covers basically the whole globe and numerous subsectors of the energy marketplace, is as bellwether as they come.
Thus, Exxon Mobil earnings are important not just for XOM stock holders, but for anyone heavily invested in the sector at large.
If Exxon is suffering, odds are the rest of the sector will be in a similar boat. And it’s a good bet that we will see trouble, and that the trouble is running deep. See, Exxon’s upcoming earnings report — due out Thursday, April 30 — will cover the first full quarter under today’s low-crude-oil environment. That should drive earnings into the toilet and set a dour outlook for the rest of the year.
But just how bad could things be for Exxon and XOM stock? Here’s our look at what to expect in the upcoming Exxon earnings report.
Here Comes the Drop!
Exxon’s annual Q1 report is typically a joyous occasion, filled with hefty buyback announcements, dividend increases and profits larger than the GDPs of small nations.
Unfortunately, the past 90 days haven’t been all that swell.
Analysts expect Exxon earnings of just 82 cents per share on revenues of $53.15 billion. While those numbers are still pretty impressive on a nominal basis, it’s a huge kick in the teeth for XOM. The same period a yar ago, XOM was earning $2.10 per share on revenues of more than $100 billion.
Of course, we were in a much different environment then. Benchmark oil prices were down by roughly half during the soon-to-be-reported quarter. The combination of record high supplies (thanks to fracking) and lower demand (thanks to a middling economy and fuel efficiency measures) took the gusto out of oil prices.
And if your profits depend on higher oil prices, well …
In Exxon’s latest annual report, it states that a $1 per barrel drop in the annual weighted average price of crude will reduce its full total upstream earnings by $350 million. That’s before any other company-related items. So naturally, a roughly $50 per barrel difference in oil prices will show up in Exxon’s bottom line.
Just like other integrated rivals that have reported recently — think Total SA (ADR) (NYSE:TOT) and BP plc (ADR) (NYSE:BP) — Exxon’s not due for a typical quarter.
However, XOM may have some bright spots, and could surprise to the upside on low estimates.
One of those bright spots is production. Like many larger energy stocks, falling production has been a pain in the neck for years. For Exxon Mobil, production fell from a high of 4.47 million barrels of oil equivalent (BoE) per day back in 2010 to only 3.97 million BoE last year. However, 2015 could be the year that Exxon finally moves in the right direction.
Several key projects are about or have recently started churning out energy. Projects like new liquefied natural gas (LNG) facilities in Papua New Guinea or expansions to its Kearl oil sands field with partner Imperial Oil Limited (USA) (NYSE:IMO) should help Exxon drive and achieve its goal of growing production by 2% annually.
Additionally, the increase in production should be “wet.” After buying XTO back in 2010, the vast bulk of Exxon’s production was dry gas. That’s a problem because even in this low-price environment, oil still has a higher realization rate and price than natural gas. Since the purchase, XOM has worked hard to increase its oil cut. Last year, liquids finally made up more than 50% of Exxon’s production mix, though, and that trend should continue this quarter.
All this has at least one analyst thinking that Exxon could actually beat earnings estimates by a wide number.
Should You Pull the Trigger on XOM Stock?
Should you buy XOM stock before earnings? Well, you certainly can’t go too wrong with Exxon Mobil, or most integrated giants, for that matter. And while the quarter won’t be great, this fact is likely already baked into shares, which have fallen some 15% since oil prices started tanking last summer, including a 7% drop since February.
So unless Exxon earnings really bomb, odds are that XOM stock isn’t going to dive that much.
But the upside could be pretty good. If Exxon beats, or announces a more positive outlook (or perhaps a large acquisition), XOM shares could pop higher. The key will be near-term outlook.
Longer-term, however, I think things are pretty rosy for the current king of energy.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
