It’s been about two weeks since Exxon Mobil Corporation (NYSE:XOM) reported its latest quarterly earnings report. To say that the report was “abysmal” would be putting lightly.
XOM’s report was full of impairment charges, a big-time miss and other issues that made the oil major look like some junior wildcatter.
This was not the XOM that investors were expecting at all. Especially considering just how well oil prices were doing over the past few months. It justifiably caught a lot of XOM investors off guard.
And since that time, Exxon stock has kind of floundered. Sure, it’s moved up with the broader markets. But not with the same sort of vigor. It’s almost as if investors are hesitant about Exxon’s prospects. And there is a good reason to be.
The question now is whether the report was just a one-time hiccup for XOM or if there is something more sinister afoot at Exxon.
A Bad Quarter & Year for XOM Stock
To put it bluntly, Exxon’s latest results were pretty darn ugly. The oil major reported earnings of $1.7 billion, or 41 cents per share assuming dilution. That missed expectations by about 29 cents per share. Revenues for the quarter also declined. The culprit was a massive impairment charge at its dry gas operations in the Rocky Mountains.
For the full year, XOM earned just $7.8 billion. I say “just” as it was just a few years ago that Exxon would earn nearly that much in a single quarter. So already, things aren’t exactly going well. But when you start to dig in even further, you can see some of Exxon’s problems taking shape.
A major one continues to be production declines. XOM has had troubles keeping up with rising oil production for what seems like years now. The hope was that recent moves and production start at some major fields would actually move the needle for the firm. Well, it turns out investors will have to wait another year to see results. Exxon’s numbers showed that production was down 3% year-over-year. Considering that oil and natural gas prices spent much of 2016 rising, that’s a big problem.
And it’s being reflected in XOM’s cash flows. Since oil’s peak back in 2014, Exxon has seen its cash flows slump by roughly 63%. Its cash on hand has slumped as well. The oil firm started the quarter with around $5.1 billion in cash. By the end, it finished with $3.7 billion in cash on hand. So despite the robust cash flows highlighted by management on the announcement, Exxon still had to dip into its reserves to pay the bills — namely its debt expenses.
So XOM is earning less money and seeing lower production. Neither of which are splendid things to see when considering buying stock.
Still an Improvement for Exxon
The reason why the bad quarter and year could be just a hiccup that’s being taken way out of proportion is that the quarter is an improvement on its recent performances.
This past fourth quarter was the first time since 2014 that XOM had positive year-over-year revenue growth. And this gain is just the latest sequential increase in revenue since bottoming out in 2015. So clearly higher oil and natural gas prices are having some positive effect on Exxon’s bottom line.
Exxon’s profits have risen as well. Without the dry gas charge, XOM stock would have earned $3.7 billion. That’s higher than the previous quarter and builds on the notion of rising oil prices boosting its returns. Meanwhile, its higher margin chemicals and downstream segment continue to support the firm in good times and in bad. While traditional oil refining has slipped, it still has helped support the less-than-ideal upstream/production segment.
And while its cash balances dipped, the $9.5 billion in operational cash flows that XOM recorded happened to be a significant 51% improvement over the previous quarter. And those cash flows did happen to more than cover its $3.1 billion in dividends and operational expenses during the quarter. Capex has also continued its decline as a few of Exxon’s key projects have now started or will start producing soon.
Bottom Line on XOM Stock
On the one hand, things are still pretty junky for XOM shares. The oil downturn hit the firm hard, and its effects are still lasting. On the contrary, it has shown improvement and continues to grind forward. The question is, are those improvements worth the price-earnings ratio of 43 that XOM stock currently trades for? I’m not so sure.
Investors have already baked a lot of growth and recovery into Exxon stock in its current form. Perhaps almost too much. XOM still has plenty of blemishes. Albeit, the Stridex is starting to clear the problems away.
But they are there. Investors may be fooling themselves if they think XOM stock can meaningfully grow enough to justify that P/E. Will the stock surge, if it actually hits that potential? No, because it’s already priced like it will.
In the end, XOM is more likely a value trap at this point. It won’t evaporate your capital like some “too good to be true deals,” but it won’t grow very much given its issues and current price. For investors looking for value or growth, there are better players in the energy sector that are priced accordingly.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
