Avoid Exxon (XOM) Stock Amid Plunging Profits, Buyback Cuts

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Integrated energy companies like Exxon (XOM) and Chevron (CVX) hold up better when oil prices are tanking, so it’s somewhat alarming that Exxon earnings were the lowest since 2009 and CVX profits hit a 12-year low.

XOM Exxon Mobil Corp. (NYSE:XOM)If this doesn’t convince you that it’s still too soon to go bargain-hunting in the sector…well, good luck with that.

There’s no place to hide for any company in the energy sector when oil prices are in a cyclical funk, but some names are more exposed than others. Deepwater drillers, for example, get destroyed by falling prices. But oil majors like XOM and CVX actually see some upside on low prices for oil.

Sure, the upstream business of exploration and production gets slammed by a drop in prices, but the downstream business of refining and distribution benefits from a decline in input costs.

Too bad all the downstream business could do for XOM stock was cushion the collapse, as prices fell faster than the company could lower costs.

Indeed, the oil market created a sort of Bizarro World-version of Exxon earnings for the June quarter. In normal times, XOM’s upstream business generates by far the most profits. In the latest quarter, however, downstream income came close to profits from drilling and pumping.

XOM’s chemical segment also enjoyed a big lift from lower input costs.

XOM Stock Hit By Earnings, Buyback Cut

But the downstream and chemical parts of XOM can’t offset the massive damage being done to the normally lucrative business of finding and extracting oil.

On the downstream side of things, earnings more than doubled to $1.51 billion. The chemical segment did almost as well, jumping nearly 50% to $1.25 billion.

But total revenue fell by a third — missing analysts’ average forecast — and the reason was plunging upstream profits that fell almost 75% to $2.03 billion.

The bottom line was that XOM earnings were essentially cut in half to $4.19 billion, or $1 a share, which fell short of the Wall Street estimate by 11 cents.

That’s a big miss, but it gets worse.

With oil prices down to levels last seen in the recession of 2009, XOM finds itself needing to conserve cash. It’s slashing capital spending, and — in a shocker of a move — the company cut its share repurchase program in half.

XOM said it will buy back $500 million in stock during the current quarter, down from $1 billion in the second quarter and $3 billion in the three-month period before that.

Share repurchase programs have been a key part of the long-running bull market, and have been especially important to limiting downside in XOM stock.

The reduction is also going to cause some anxiety over the XOM dividend, currently yielding a generous 3.7%.

It’s almost unthinkable that XOM — a component of the Dow Jones Industrial Average and an InvestorPlace Dependable Dividend Stock — could lower its payout. After all, it has adequate cash flow and an unbroken record of dividend growth going back to 1983.

But that won’t keep at least some part of the market from applying an additional discount to XOM stock to reflect that risk, remote as it might be.

The longer the slump in oil prices lasts, the more investors are going to worry about XOM’s ability to return cash to shareholders. That’s a serious headwind at a time when earnings have reverted to recessionary levels.

Don’t go bottom fishing in XOM stock just yet.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/exxon-xom-stock-earnings-plunge/.

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