Recent improvements in oil prices were supposed to give big oil companies some room to breathe. That clearly wasn’t the case with Exxon Mobil Corporation (NYSE:XOM), as the company just reported its worst quarterly results in two decades. And that doesn’t bode well for a long-anticipated rebound in XOM stock.
Some of the numbers from Exxon’s earnings report were ugly: a $2 billion write-down of its natural gas fields, its smallest quarterly profit in more than 17 years, and its worst full-year results since 1996. The company earned a mere $1.68 billion in net income during the fourth quarter, its weakest haul since a $1.53 billion profit in the third quarter of 1999.
It marked the ninth straight quarter of year-over-year profit declines for Exxon.
In fairness, the natural-gas write-down was the big reason why Exxon’s profits slipped so far. Without it, XOM would have earned 89 cents per share, more than double the 41 cents it actually earned.
Still, the bottom-line results don’t look good. Some thought Exxon would have gotten more of a bump in December, after OPEC decided to cap production for the first time in years, prompting oil prices to jump above $52 a barrel for the first time since mid-2015.
But the two-and-a-half-year slump in oil prices runs far deeper than that for the largest oil producer in the world.
XOM Stock Problems Run Deep
With oil losing more than 70% of its value in a two-year span, Exxon has been forced to cut costs by slashing capital and exploration spending. The residue of that decision is that the company isn’t producing enough oil — production was down 3% from the fourth quarter of 2015. Thus, even with higher prices, Exxon hasn’t been able to produce enough oil to keep pace with its former self.
The good news for Exxon stock investors is that it appears Tuesday’s big earnings miss was already priced in. XOM stock tumbled just over 1% in Tuesday trading, and has bounced back slightly in early Wednesday trading. After falling from $92 to $84 since mid-December, it appears most of the XOM sellers have already been shaken out.
But it can’t afford to fall much further. Trading in the mid $83’s as of this writing, XOM stock has yet to test its six-month support level in the low $82s. If that support breaks down and the stock dips below $82, it could be in for another push lower, and perhaps threaten its 52-week low of $78.
For now, the damage from yesterday’s disastrous earnings report has been limited. And one ray of light from the fourth-quarter report was that sales improved 2% — the first year-over-year revenue increase since the second quarter of 2014. With its hefty natural gas write-down behind it and oil prices firmly above $50, perhaps next quarter’s results will look a lot better.
In the meantime, we’ll see if XOM stock has become a bargain buy in the eyes of value investors banking on the continued turnaround in the energy sector.
Avoid XOM Stock … For Now
Until it starts to show some real signs of life, however, I wouldn’t go snatching up XOM shares just yet. Not until the scars from 30 months of plummeting oil prices begin to heal.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
