Exxon Mobil Corporation (XOM), one of world’s biggest oil and gas companies, published disturbing 1Q 2019 results, despite the notable crude market price appreciation observed in the second half of the year. Compared to its peers, XOM is still overvalued, even if the stock is now trading near the $73 trading support. In this context and with the recent crude market correction, XOM should continue to suffer, following disturbing downstream and chemical tightness.
Poor quarterly earnings and a rapidly changing oil environment penalized XOM value creation
Since my previous note, XOM‘s 1Q 2019 quarter release disappointed, amid plummeting quarterly earnings, increasing debt and decreasing free cash flow. After beating analysts’ earnings estimates in the last two quarterly releases and notwithstanding the consensus’ downward revisions, XOM’s earnings and revenue declined, respectively, 60.8% (q/q) to $2.35b and 11.5% (q/q) to $63.62. In that vein, earnings per share plunged to $0.55, sending the company’s profitability back to early 2016 levels, when crude markets were evolving at a decade low of $35 per barrel.
That being said, during 1Q 2019, XOM seemed unable to quickly adapt to a rapidly changing crude environment and in spite of declining operating costs, down 7% (q/q) to $59.3b, XOM’s heavy cost structure did not compensate the significant revenue decline of 11.5% (q/q) to $63.6b.
Nevertheless, XOM’s visionary investment focus should pay off in the long-run; however, this comes in an precocious period, characterized by increasing oil volatility and growing commercial and geopolitical tensions. Indeed, with slowing cash flows from operations, down 3.1% (q/q) to $8.3b, weak quarterly asset sales and slightly declining CAPEX, FCF generation continues its downward move, losing 5.6% (q/q) to $1.5b. Going forward, untimely high capital spending should continue to weigh on XOM’s FCF generation, which I expect to remain limited in the near-term, putting the company in a difficult position compared to its peers:
More importantly, XOM’s bottom line plunged significantly and net income declined by a whopping 60.8% (q/q) to $2.3b, although oil equivalent output steadied during the period, down 0.7% (q/q) to 3981 koebd.
Given that dull earnings picture, XOM’s investors have a few reasons to worry and I believe that the short-selling pressure initiated after the earnings release is not yet behind us.
In spite of increasing crude output, XOM’s downstream and chemical business collapse
During the quarter, XOM’s results took hits from all sides. Earnings by divisions dipped in every single business compared to previous quarter, following lower sales, tightening oil cracks and higher maintenance.
Upstream division posted ‘best’ in class results over the quarter, declining 13.2% (q/q) to $2.8b, despite an overall oil backdrop improvement, production volumes in line with 4Q 2018 levels and a strong Permian production growth, up 19% (q/q) or 36 koebd. Nevertheless, inferior oil and gas volumes, lower entitlements and the absence of one-time 4Q 2018 favorable tax impacts totally compensated it.
Additionally, earnings in the downstream segment reported a net loss for the first time of the decade, in both US and non-US activities. Despite (q/q) steady petroleum product sales, down marginally 1.5% to 5,415 kbd, XOM’s downstream earnings plunged by a staggering 109.5% (q/q), establishing in a net loss of $0.25b from a gain of $2.7b in 4Q 2018. This impact is mainly due to lower margins, narrower crude differentials, higher refinery scheduled maintenance and the lack of divestment gains.
Finally, chemicals activity slowed significantly during the period, down 29.7% (q/q) to $0.51b, amid weakening sales, down 9.9% (q/q) to 2,322 kt and thinner US margins, but was partly offset by lower downtime and maintenance periods.
Going forward and given XOM’s weak 1Q 2019 report, I expect the company’s upstream business to deliver incremental growth in the short term, given growing Permian exposure and improving crude oil pricing. Furthermore, with US refining margin rebounding, US gasoline and distillates storage shortage increasing and the arrival of the peak summer driving demand are likely to sustain XOM’s downstream and chemical businesses. However, the significant 2Q 2019 scheduled maintenance in both divisions should partly offset it.
Despite disappointing quarterly results, XOM’s valuation is unreasonable compared to its peers and the market is still overvaluing future upstream growth that will take several years to fully materialize. The oil major is currently trading at a 2019e EV/EBITDA ratio of 7.53x, compared to only 4.77x for Total (TOT) and 4.6x for BP (BP), two of the largest global oil integrated companies. Similarly, 2019e P/E is also unappealing, with an implied ratio of 18.4x versus 15.6x for Chevron (CVX), 10.1x for TOT and 13x for BP.
Yet, XOM’s financial health remains comfortable, but quarterly figures slightly deteriorated its leverage ratio, increasing to 0.77x in 2019, against 0.6x in the same period of last year.
However, the company still offers an interesting yield of 4.51% for 2019. Nevertheless, European oil majors are delivering slightly higher value to investors, with respective dividend yields of 5.49% and 5.71% for TOT and BP.
In this context, I expect the market to continue to disregard XOM, following weakening deliveries in the downstream and chemical businesses and an untimely investment strategy deployed in a volatile crude oil market. That being said, I remain on the sides for the moment and expect XOM to head further south in the near to mid-term.
I look forward to reading your comments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.