Exxon Mobil Corporation (NYSE:XOM) reported earnings of 88 cents per share for its December quarter and shares promptly fell 3% in pre-market trading.
The number was in line with the earnings of the previous three quarters, which averaged 88 cents per share, but analysts were expecting $1.04 per share. The “whisper number” on earnings had been $1.11 per share.
Total earnings for the year came to $19.7 billion, on revenues of $244.36 billion.
Ignored by those dumping on the stock was an estimated $5.9 billion earnings gain from the Donald Trump tax cut. CEO Darren Woods said the company would invest $50 billion in the U.S. over the next five years to take advantage of the lower rate. The company had capital expenditures of $23 billion for all of 2017.
The dividend was left unchanged at 77 cents.
Exxon a Bargain?
Still, disappointment over missing the number knocked $10 billion off Exxon’s market cap, increasing the yield from that dividend to 3.55%. The U.S. 10-year bond, while rising during 2018, is still at just 2.77%, making Exxon a bargain for income investors.
Exxon has not been a growth stock since the last decade, when it nearly tripled in value from a trough of $34 per share to $95. Since then it has risen and fallen with the oil markets. It opened for trade Feb. 2 at $86.31.
The company’s big earnings gains in 2017 came from crude oil, where income was up $9 billion, even though production fell 130,000 barrels per day. Much of its new investment will go toward a goal of tripling production from Texas’ Permian Basin shale field, to 600,000 barrels per day.
The company doubled its holdings in the Permian last year, buying $5.6 billion of rights from the Bass family. Since then the price of oil has surged from $53 per barrel to over $65 per barrel.
Assuming the company can increase its production as promised, and oil prices stay where they are, its 2018 earnings should rise significantly. But this is not yet reflected in analyst estimates, with over half still calling Exxon Mobil stock a hold.
What Can Derail the XOM Stock Train?
U.S. shale production has become the “swing” production in the world oil market, and it continues to rise, by 94,000 barrels per day just in January, according to the Energy Information Administration. Futures markets expect this to lower the price of oil through the year, but producers can still hedge production at $60 per barrel out to March 2019, and it’s this price visibility that is driving an expansion of drilling. Futures for December 2020 production currently stand at under $54 per barrel.
Even if oil prices start settling down, however, Exxon’s earnings from refining oil and producing chemicals should rise. Exxon said it earned $1.6 billion “downstream” during the most recent quarter, with $600 million of that attributable to tax reform. Chemical earnings came in at $1.3 billion, and even excluding tax cuts they were up 7%.
The Bottom Line
Goldman Sachs Inc. (NYSE:GS) has dramatically revised its estimate on oil prices, believing tightened inventories could sent the price up to over $82 per barrel by this summer. It says demand is strong, U.S. production gains are only offsetting losses in Venezuela, and OPEC members are complying with the group’s production limits.
Should this play out, Exxon Mobil becomes and even better bet. The company has turned more toward “upstream” oil production over the last year for profits, away from “downstream” refining.
This could be the break-out stock of 2018, and if you buy now you get that nice dividend as well.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.