We’re in the thick of earnings season for the energy sector, and some of the largest and most integrated oil and gas firms are going to report this week. And you can’t get much bigger than Exxon Mobil (XOM). The company’s size and scope allow it to reap massive economies of scale, tackle major projects and produce profits larger than some countries’ GDPs.
XOM’s earnings are also a great window into just how the rest of the energy sector is going to do. After all, if Exxon’s earnings are poor, odds are the rest of the sectors will be. And given just how poor the current price environment for oil and natural gas is, things might not be so rosy — even for this giant.
Here’s our look preview of Exxon earnings and what they will mean for XOM stock.
Oil Prices Finally Hurting XOM Stock
Let’s face facts: Prices of crude oil stink right now for the major energy stocks, and XOM stock is no exception. Supplies of crude continue to build as fracking has unleashed a virtual ocean of crude oil. Meanwhile, demand for oil is down as fuel efficiency measures improve and economic growth slows in key consuming nations.
That drop in demand has killed prices for crude oil. According to the Energy Information Administration (EIA), Brent benchmarked crude has plunged about $48 per barrel or about 44% year-over-over during the second quarter. Natural gas has marked a similar decline.
If you’re one of the largest producers of both fuels, the news hits twice as hard. As such XOM is expected to report a decline in earnings versus the second quarter of last year. It’s almost inevitable. Oil prices averaged around $60 a barrel in the second quarter of 2015, compared to $110 during the second quarter of 2014.
According to XOM’s own estimations, for every $1 drop in the average price of crude oil, its full year upstream earnings after-taxes sinks by about $350 million. So expect much less profit at XOM this quarter.
In fact, Wall Street predicts that the impact of lower crude oil and natural gas prices will basically cut earnings in half vs. the same period last year. All in all, XOM should earn around $1.09 per share in profits on revenues of just $72 billion. That compares to earnings of $2.05 per share on $111 billion in revenue a year ago.
Helping offset some of the crash in crude prices is XOM’s vast downstream segment. Refining has propped up Exxon in recent quarters as it has been able to feast on lower crude oil feedstocks. And refining should help again as crack-spreads have improved.
However, analysts have predicted that XOM stock won’t see downstream profit increases as large as some of its peers due to the fact that it has a smaller trading arm than its rivals. For example, BP (BP) saw 216% jump in year-over-year refining profits, mostly due to trading. XOM’s should come in the mid-to-high single digits.
Still Some Positives At XOM
Despite all the factors weighing on XOM stock, the company also has a few positives for the longer term.
For starters, Exxon should finally turn the tide of falling production. The last few years, like most oil companies, XOM has struggled with adding enough production to really make an impact and canceling declining legacy wells.
This year, XOM has several new projects coming online. These include a major LNG project in Papua New Guinea, Canadian oil sands projects with Imperial Oil (IMO) as well as projects in the Arctic. With these additional upstream projects coming online this year, XOM estimates that it will see production rise by 2% year-over-year. That’s a huge feat for the major energy firm.
Even better, more of that production will be coming from higher priced crude oil than natural gas. XOM’s “oil cut” is already above 53%. These new projects — plus various profit sharing agreements — will help push that figure higher, improving XOM’s margins per barrel.
So Is XOM Stock a Buy?
At this point, lower earnings shouldn’t come as a shock to anyone looking at XOM stock — or any energy stock for that matter. Lower prices for crude oil and natural gas are going to bite and could bite harder than expected.
However, if there is any firm that can handle the current price environment it’s Exxon. We should see that in its latest earnings report on Friday. In the longer term, the additional production gains should help it turn the tide and ultimately improve revenues and cash flows.
Currently, XOM trades for a forward P/E of 15. Not too expensive, but not super cheap either. Any downward pressure due to lower than expected earnings could be seen as a chance to buy the major energy stock at even cheaper values.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
