When it comes to energy stocks, none is more important than Exxon Mobil Corporation (NYSE:XOM). Exxon Mobil has its hands in just about everything related to oil and gas, whether it’s production, shipping or refining.
As Exxon goes, so goes the entire energy sector, so when it’s time for the energy giant to report earnings, the entire sector pays attention.
Which is unfortunate, because today is not exactly a red-letter day for XOM stock.
Sure, Exxon earnings beat the Street, but the report wasn’t exactly a glowing win for the integrated energy producer. Falling energy costs are wreaking havoc even on venerable Exxon Mobil … to the point where some analysts have even begun to question XOM’s dividend policy.
Trouble’s brewing. But how bad are things really?
XOM Lowered Profits
After major integrated rival Chevron Corporation’s (CVX) big-time earnings disaster and miss, the markets were on edge for Exxon’s latest earnings.
The headline numbers were earnings of 67 cents per share on revenues of $59.81 billion, and that doesn’t sound all that bad considering Wall Street was looking for 63 cents on $51.36 billion in revenue.
But …
Last year at this time, Exxon managed to report earnings of $1.32 a share on revenues of $87.28 billion — so, a nearly 60% decline in profits and a 30%-plus drop in sales.
Lower oil prices are the obvious culprit. This quarter, Exxon Mobil’s upstream segment was a disaster. The current sub-$30 per barrel price point for crude oil and sub-$2.50 price for natural gas managed to help the energy giant realize a $538 million loss in its upstream segment.
Now, while Exxon doesn’t look at specific quarter-to-quarter projections when it undertakes massive projects to produce crude, the “lower for longer” environment is starting to crimp those projects in a big way. That -$538 million figure is a $2 billion decline.
Let that sink in. XOM — one of the biggest energy companies in the world — can’t make money producing oil at this rate.
What saved Exxon’s day was what had been working for the last few quarters — namely, refining and chemicals cracking. Here, Exxon Mobil was able to feast on the lower price for crude oil and natural gas. Margins remained strong, and the group’s focus on crude oil cracking helped. Overall, XOM managed to see an $854 million boost from its refining operations that span a multitude of nations and product types. That helped the refining segment see a profit of $1.4 billion.
Other businesses such as trading and marketing and midstream also saw contributed to the earnings beat.
XOM Did See Higher Production
One other positive from the report is that while production profits were negative, production itself actually grew. That’s a big deal, as the past few years have disappointed thanks to major declines in legacy fields.
The startup of new projects — such as the Banyu Urip field in Indonesia — helped overcome those declines at older fields. For the quarter, XOM saw a 4.8% jump to its production numbers.
The real win was that crude oil saw the biggest jump in overall production gains. Over the longer term, that should help the firm … you know, if oil prices ever come back.
The Troubling Thing for Exxon Mobil
While the report technically was a beat, it does signal some trouble for XOM stock.
The fact that upstream actually was a loss is a huge deal for a major energy producer — even more so when oil prices have continued to deteriorate beyond the average that Exxon Mobil had during the reported quarter. We’ve seen oil drop by about $10 to $15 per barrel since the start of the year, which means earnings for the current quarter are going to be problematic unless prices dramatically rise, and soon.
The problem comes down to cash flows. For the quarter, Exxon had cash flows of $5.1 billion, of which $785 million were due to asset sales. The problem is that XOM paid out about $3.6 billion in dividends and buybacks. That’s starting to cut it close — perhaps too close — given that oil has plunged further.
And yes, Exxon does have a hefty cash balance and plenty of assets/treasury stock to sell, but it’s still not the best situation for investors buying XOM stock for that dividend.
Exxon Mobil isn’t going to vanish, and the dividend isn’t going to get cut in half. But things are getting tight even for the largest of energy plays.
If nothing else, investors should take this as a troubling sign for the rest of the energy sector.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
