No one is arguing that times are tough in the energy sector. And those tough times have even spilled over to the mighty Exxon Mobil Corporation (NYSE:XOM). Exxon stock hasn’t exactly been “putting a tiger” in investor’s tanks over the last couple of quarters. Earnings and revenues have plunged in the wake of the unprecedented drop in oil prices. Not even XOM can really make money when oil is trading for sub-$30 per barrel.
As expected, this quarter was much of the same for the Exxon stock.
But with oil prices rising over the last three months, XOM stock found itself in a much better financial position. And that ended up helping it a tad when it reported earnings.
Nevertheless, Exxon stock is far out of the woods when it comes to regaining its mojo and it’ll need to see some pretty big oil price improvements to really fix many of its issues. In the end, there some good, plenty of bad and even some ugly in the latest earnings numbers from XOM.
Exxon Stock: Better Than Expected
The real bright spot for investors is that Exxon is still profitable overall and the firm still managed to make some serious coin. XOM’s integrated model simply pays plenty of benefits. That model of owning producing assets as well as refining facilities, allows Exxon to profit in almost any sort of pricing environment. Just look at rivals Marathon Oil Corporation (NYSE:MRO) and ConocoPhillips (NYSE:COP) over the last two years. Spinning out their refining operations turned out to be a very poor idea, indeed.
As with recent quarters, Exxon’s refining operations managed to help the firm really move the needle. And in this case, it helped XOM stock report better than expected earnings of 63 cents per share. The key is not to look at the year-over-year figures, but sequentially.
Year-over-year, Exxon produced another quarter of disaster — it’s eight in a row and the worst streak for Exxon stock since 1988. Third-quarter profits declined by 38%, while revenues cratered … there’s no “if’s, and’s or but’s” about it, XOM stock is still struggling hard.
But it is struggling less. Sequentially, Exxon saw its earnings-per-share rise by 54%. That’s a pretty big jump for the struggling integrated energy firm and it shows that its efforts to control what it can are actually working.
Through various cost-reduction programs, XOM has managed to cut its CAPEX spending by 45%. Exxon spent only $4.19 billion last quarter, drilling and producing oil. That was down from more than $7 billion a year ago. Those CPAEX cuts clearly started to take full effect during third quarter and worked to Exxon’s advantage.
Where It Starts to Get Bad for XOM Stock
Yes, earnings are improving at Exxon. That’s certainly a great thing. XOM most likely saw its earnings bottom out during the second quarter and now, we’re starting to see things rise. As oil prices rise, we should see Exxon start really making the dough. However, the key word in that is “should.”
Oil prices actually averaged slightly higher during the third quarter and XOM stock had those big CAPEX cuts. So things should have been rosy. However, the U.S. upstream segment at Exxon actually lost more money than the previous quarter. Adding in international production, upstream earnings still sank 16% on the back of higher oil prices. Likewise, refining helped run the show, it also managed to see a massive decline as higher oils crimped once fat margins.
The only way XOM was actually able to realize any sort of profits was by crimping that CAPEX spending. That’s not a good place to be in.
To make matters worse, Exxon’s cash flows were better during the quarter. The kicker here was that it has paid out more in dividends than it made in profits — by about $400 million. With already one debt downgrade on its hands, Exxon is continuing to play fast and loose with its dividends. Especially, if it can’t get its act together and start making some serious money. And even more so now, considering it just raised the payout by 3%.
The Looming, Ugly Problem at Exxon
And it may have some trouble making that money … at least on an accounting basis.
Buried in its earnings release was a ticking time bomb. New York Attorney General Eric Schneiderman and the Securities and Exchange Commission have questioned why XOM hasn’t written down the value of its assets during the recent oil plunge. Exxon has stated that it has limited its exposure to write-downs because it is extremely conservative when initially recording the value of a new field. It underestimates the “real” value when first recording it.
That gravy train may have ended. XOM may be forced to write down as much as 4.6 billion barrels that are no longer profitable to produce. That will be one heck of an accounting charge to its bottom line. While it is not detrimental long-term and it can rebook the fields once profitable again, it still is going to significantly affect things during the fourth quarter — just when Exxon should see things really start to improve.
Bottom Line on XOM
For investors, Exxon stock is still a mixed bag. While things are starting to improve, other items continue to kick it further down the long road from being like the old Exxon. In the end, unless things really start to move in a very positive direction, XOM stock investors could be in for a much longer ride than they may want. Exxon isn’t a bad energy stock, it’s just quickly becoming a story of “wait until next quarter.” Hopefully, that quarter will come sooner than later.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.