Exxon Mobil (NYSE:XOM) surprised investors with a huge beat on earnings Feb. 1. Earnings of $1.08 per share were expected, and there were whispers it might be $1.12 per share, but the final number was $1.41 per share. In response, Exxon Mobil stock jumped about 2% in pre-market trade, on the back of a 1.4% gain the previous day.
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The main lesson from XOM earnings is that volatile oil pricing can pay.
The big gains for Exxon in 2018 were in upstream profits outside the U.S., where income came in at $12.34 billion for the year, against just $1.74 billion in upstream profits in the U.S. The oil business defines “upstream” as oil exploration and production, “downstream” as refining and marketing, and “midstream” as the oil pipelines and tankers that move the product from production rigs to refineries.
While U.S. oil prices remained low during the period, CEO Darren Woods said the company’s “technology, scale and integration” let it “successfully compete across commodity price cycles.” In other words, it’s good to be the king.
Inside the Number
As I noted in December, you buy stocks like Exxon Mobil for the dividends, when oil is cheap. The dividend for Exxon Mobil stock is 82 cents per quarter, a yield of nearly 5% on Christmas when the stock hit a low of $67 per share. At Exxon Mobil stock’s expected opening price of $75 per share on Feb. 1 that yield is just 4.4% after the earnings report.
XOM also beat estimates on revenue, at nearly $72 billion against $71.3 billion expected.
For the full year, Exxon reported earnings of $20.8 billion, $4.88 per share, on revenue of $290 billion. This compared with net income of $19.7 billion on revenue of $244 billion last year. Investors collected $3.28 per share in dividends.
Exxon Mobil has been restructuring in the face of lower oil prices, hoping to double its cash flow over the next five years by consolidating its production into three units and expanding its U.S. refining in the face of rising Texas shale oil supplies.
During the quarter, Woods said the company benefited from rising shale production, up 90% year-over-year, and higher natural gas prices. Its size and logistics let it “capture benefits from North American crude differentials,” taking the cheapest possible oil into its refineries and producing the largest possible profits on the resulting product.
Optimistic Guidance
Exxon also noted that oil prices jumped 18% in January, which should help buoy first-quarter earnings, but that XOM believes it can still be profitable with oil at $35-40 per barrel. Texas oil currently trades at roughly $53 per barrel.
While XOM’s biggest profits lay in international oil during the quarter, it expects the expansion of its Beaumont refinery to help increase U.S. profits as it becomes the largest producer in the Permian Basin and pipelines are expanded to bring that oil in for refining.
The Exxon earnings release also highlighted the company’s big finds off Guyana, near the border of Venezuela, where it claims to have found 5 billion new barrels of oil, and equivalents.
The Bottom Line on Exxon Mobil Stock
The big earnings beat sent speculators scrambling to buy XOM, but the Exxon Mobil stock price quickly fell back as traders realized that investors buy XOM for income, not for capital gains, and a rising stock price would mean a lower dividend yield.
Speculating on XOM stock now means betting that the higher earnings and positive outlook will lead Exxon to consider raising the dividend, which was covered by earnings nearly twice over during the fourth quarter. Exxon’s enormous operating cash flows, $8.06 billion in the fourth quarter alone, is $1.90 per share on 4.23 billion shares.
For XOM stock investors, it’s still the dividend that counts.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
