The third quarter’s earnings season thus far has been encouraging enough for the energy sector. Total SA (NYSE:TOT) and BP plc (NYSE:BP) both recently posted results that topped expectations, and ConocoPhillips (NYSE:COP) did the same a week back. The one earnings report from the energy sector that could taint the whole group’s quarter, however, lies ahead. Exxon Mobil (NYSE:XOM) will be posting its Q3 results on Friday morning, leaving owners of XOM stock with a tough decision to make between now and then.
Expectations are low, yet somehow they don’t seem low enough for a company that’s been unable to at even just meet its earnings estimates in four of its past five quarters.
XOM Stock Is Alarmingly Troubled
There’s a reason XOM stock is one of the lowest-rated integrated oil and gas stocks among the majors right now. (As of the latest look, Exxon stock is considered more of a “Hold” than a “Buy,” scored at 2.8 on a scale of 5 to 1, where 5 is the most bullish opinion and 1 is the most bearish). It’s a complicated, multi-faceted reason, but a reason nonetheless.
The company’s recent earnings reports help bring clarity to the ambiguous overhang.
The recurring theme found woven into the details of ExxonMobil’s Q2 report? Explanations like “Overall throughput and earnings were impacted by heavy turnaround and maintenance activities during the quarter,” “Chemical margins weakened during the quarter as higher feed and energy costs outpaced stronger realizations” and “Stronger liquids prices and higher liquids volumes, largely offset by higher expenses and lower gas prices” — along with variations on that theme — were found throughout the company’s official report.
All oil and gas companies run into unexpected headwinds like hurricanes, earthquakes and geopolitical disruptions. And they each have to do regular maintenance. In an unscientific, subjective way though, it seems Exxon Mobil runs into more than its fair share of such headaches. One only has to review the company’s first quarter report to recognize many of the same troubles that held the company back in the second quarter weren’t exactly new.
Missed Opportunity for Exxon
At first blush, costs and revenue may appear to be beyond the company’s control. That’s not entirely the case though, and in some regards isn’t the case at all. Oil companies can hedge. They can reorganize to eliminate expenses. They can negotiate better prices. They can explore and spot prospects more effectively.
Exxon Mobil just isn’t doing those things all that well.
Perhaps the biggest operational red flag of all to XOM stock holders? Oil-equivalent production was down 7% for the second quarter, and down 3% year-over-year in the first quarter. Given the level of capital expenditures the company has made since stepping up its spending in the latter half of last year, one would expect at least some of that investment to have started bearing fruit. Even if not though, one wouldn’t expect output to slump at a point where crude prices were the strongest they’d been in three years.
Edward Jones analyst Brian Youngberg stated the obvious by opining in front of the company’s Q3 earnings release “Production has been disappointing for a while.” But, he’s one of the few analysts to directly say what many other analysts and most other investors may be tacitly thinking. He also explained “They’ve slipped on the operational side.”
The assessment may understate the matter though. ExxonMobil still has a mountain of challenges to address, most of which remain tough to pinpoint, and some of which may ultimately be a function of the company’s sheer, overwhelming size.
Looking Ahead for XOM Stock
ExxonMobil has a chance on Friday to prove to shareholders, and to the world, that it’s not just a misguided collection of operations that happen to be under the same umbrella. Betting that it will decisively do so, however, probably isn’t a great bet.
On the other hand, even a hint of better operational control might be enough to sate existing and prospective XOM stock owners. Unfortunately, it won’t be crystal clear how or even if the company is cleaning itself up and running a tighter ship. Investors will have to figure that out for themselves, in many cases reading between the lines. Stepped-up production, though, would be a clear clue that it’s at least got a grip on its steering wheel.
Whatever message ends up being delivered about operational efficiency, the numbers will still matter. Analysts are collectively calling for per-share earnings of $1.23 on revenue of $73.55 billion, both up from year-ago comparisons of 93 cents per share of XOM stock and sales of $66.17 billion.
Just bear in mind that ExxonMobil doesn’t have a great track record when it comes to topping earnings estimates.
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.