The good news is, Exxon Mobil Corporation (NYSE:XOM) drove some pretty significant revenue and earnings growth last quarter. The bad news is, the company failed to earn as much as analysts were expecting for the quarter in question, sending Exxon stock lower on Friday following a respectable rally leading up to today’s report.
Still, between the year-over-year progress Exxon Mobil is making and oil prices that are rising rather relentlessly, sellers aren’t exactly inflicting major damage in response to the report. That may be because investors are keeping things in the right perspective.
It may also be because rival Chevron Corporation (NYSE:CVX) did manage to top its earnings estimates, pushing the stock higher, ConocoPhillips (NYSE:COP) also reported an earnings beat after Thursday’s close, bolstering the bullish case for the energy sector.
Ditto for Phillips 66 (NYSE:PSX), which reported on Friday morning too.
In other words, don’t take the earnings report at face value, and don’t take the knee-jerk response from XOM to heart. There’s an industry-wide rising tide here that Exxon’s playing a little differently than most.
Exxon Mobil Earnings Recap
For its first fiscal quarter of 2018, ending in March, oil and gas giant Exxon Mobil earned $1.09 per share on revenue of $68.2 billion. It produced 3.9 billion barrels of oil, or equivalent, during the quarter.
The bottom line was up from the year-ago figure of 95 cents per share of Exxon stock, while the top line grew from $58.7 billion, though output of oil fell 6%.
Sales were better than the $67.2 billion analysts were collectively expecting, but traders couldn’t get past the fact that earnings missed expectations of $1.10 and that oil output fell short of the expected pace of just over four billion barrels.
Exxon stock was down a little more than 5% in early trading action Friday, more than unwinding Thursday’s gain. Still, XOM stock is up 6% since late March.
CEO Darren W. Woods commented on the numbers:
“Increased commodity prices, coupled with a focus on operating efficiently and strengthening our portfolio, resulted in higher earnings and the highest quarterly cash flow from operations and asset sales since 2014.”
Crude oil prices only ended the quarter about 2% higher than where they were when the quarter started, but that late-March value of $61 per barrel was significantly stronger than the March-2017 closing price near $52.
Operational cash flow reached $8.5 billion during the quarter, though roughly half of that total was the result of depreciation. Operational net income rolled in at $4.8 billion.
Drilling Down
Woods added:
“Through new discoveries and acquired acreage, we’ve positioned our Upstream portfolio well for future growth. We also made good progress on our plans to improve the production mix and grow premium product sales in the Downstream and Chemical businesses.”
Exxon Mobil’s Upstream business continues to be the breadwinner. It produced $3.5 billion of last quarter’s total net income, up 40% from the fourth quarter of last year, and 59% better on a12 year-over-year basis.
Higher prices and lower expenses were contributing factors, with a particularly cold winter keeping natural gas prices firm.
Boosting the Upstream business was a sparingly successful Hebron field, in Canada, and an 18% growth in yields from the company’s Permian and Bakken properties.
Exxon’s Downstream arm saw net earnings decline a bit, to $940 million, while its Chemical business produced just a little over $1.0 billion in earnings. That was also down just a bit from the first quarter of 2017 thanks to rising growth-related expenses.
Major expenses incurred last quarter include the commissioning of an ethane cracker in Baytown, Texas, new polyethylene lines at its chemical plant Mont Belvieu, Texas and the purchases of new exploration properties in Africa as well as South America.
All the spending, while preventing Exxon Mobil from meeting last quarter’s earnings outlook, should bolster the value of XOM stock in time.
Bottom Line for Exxon Stock
It’s certainly alarming, in a superficial sense, when all of its peers managed to exceed estimates while Exxon Mobil didn’t. The particular miss may not be as devastating as investors are making it out to be though, as XOM is a bird of a slightly different feather… even within the oil and gas industry.
Eaton Vance analyst Eddie Perkin may have his finger on the pulse of Exxon’s nuances more so than any other. He explained Friday morning after the earnings report was posted:
“The debate on Exxon has been the capital spending, and what is true for the industry I think is not necessarily true for Exxon. And that is, this is an industry that over long periods of time has not generated good returns on invested capital, so investors want to see companies being very judicious with capital spending. In the case of Exxon they have many high-returning, high-potential projects, so if they’re investing capital into good projects, then we don’t have any issue with that.”
And that does indeed seem to be the case. That is, though you have to look beyond last quarter’s numbers and understand the projects Exxon Mobil is not only taking on, but the projects it’s shedding, then you can see last quarter’s earnings shortfall may have been a short-term sacrifice for the promise of a bigger and better payback down the road.
That makes XOM a compelling prospect, even if it doesn’t feel like it today.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
