Exxon Mobil Corporation (XOM), with its enviable asset base that covers the whole globe and numerous subsectors of the energy marketplace, is as bellwether as they come.
But, lately, it hasn’t exactly been acting like the steady Eddie blue chip it used to be.
The rout in oil prices has made Exxon Mobil feel more like a rollercoaster at Cedar Point. This week, XOM seems to be on an upswing in the track.
The integrated energy giant has certainly been putting a “tiger in the tank” of investor’s portfolios during the last few weeks. Over the last three months, Exxon stock has managed to gain 17%. That’s huge considering how much XOM has been hit during the recent oil price downturn.
The question for investors now is whether Exxon Mobil has the goods to keep those gains going and if XOM shares are worth the ride.
XOM Gains on Crude Oil
Even the largest of energy stocks still are at the mercy of crude oil prices, or at least these days they are. After all, when you’re in the business of selling a commodity or products based off a commodity, your underlying profits are totally driven by the price of that commodity.
So traders have been using oil prices as a reason to buy and sell various energy stocks, including integrated giants like XOM.
And lately, crude oil has been taking a sharp turn upwards.
Supply cuts and reduced production across the U.S. and in several other key regions has potentially put a bottom in for the commodity. After reaching 11-year lows of around $26 per barrel, crude has finally begun to move upwards as the glut is less “gluty.”
Today, prices for Brent crude oil are above $41 per barrel. West Texas Intermediate prices have experienced a similar jump upwards as rig counts in the U.S. continue to drop and the amount of oil in storage has been reduced.
That difference is incremental to Exxon’s bottom line.
According to XOM’s own estimations, every $1 drop in the average price of crude oil, takes off about $350 million in its full upstream after-tax earnings. And we’ve already seen this fact in action.
Last quarter, lower average oil prices resulted in a 60% decline in profits and 30% decline in revenues versus the same quarter a year ago. In fact, the low price for crude actually resulted in XOM losing money in its exploration and production units.
So the recent bump in crude oil prices is a reason to celebrate.
Maybe Not Just Yet for Exxon Stock
We might want to tack on an asterisk onto “celebrate.” The problem is that while rising crude oil prices are great for Exxon’s long-term, the near-term still isn’t rosy. And you can expect that to be reflected in its latest earnings.
Average crude oil prices have actually dropped — by about 22% — over the last three months when compared to previous quarter. That’s about a $10 per barrel difference. As a result, XOM’s earnings are going to tank even harder this quarter than the last.
Analysts are expecting XOM to only earn about 31 cents per share. That’s down from 67 cents earned last quarter and $1.17 per share earned in the same period a year ago. That’s more than a 50% decline on a sequential basis. The firm has done some cost cutting, but with its Exploration and Production division already losing money on higher oil prices, it’s not going to be good.
Furthermore, XOM may not be able to lean on its crutch of its integrated operations. Despite the lower crude oil prices, crack spreads haven’t been as great as previous quarters. Refiners went full tilt when crude was low, gasoline demand high and crack spreads wide.
That good deed for their bottom lines did not go unpunished. There’s now a sort glut of gasoline on the markets. As a result, crack-spreads have been reduced.
XOM may not be able to overcome enough of the issues in its E&P segment with refining.
Bottom Line on Exxon Mobil
While crude oil prices have started to rise — and that’s good for XOM longer term — the near term just isn’t there. The recent bump in Exxon stock maybe a little misplaced considering what has just transpired. Investors plowing into XOM might be setting themselves up for disappointment and potential losses when the firm reports earnings here in a few weeks.
Any sort of miss — because of poor refining or one-items — could exacerbate any loss even further.
So is Exxon stock a buy?
Yes, but wait a bit — at least until earnings. You’re still going to see Exxon report junk based on the previous three-month’s worth of lower prices. You’ll see the good stuff start coming down the pike later on, assuming that oil keeps on rising throughout the quarter.
As of this writing, Aaron Levitt was long Vanguard Energy ETF, which holds XOM stock.