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Exxon Mobil Corporation (XOM ) is one of the largest integrated oil and gas companies in the world. Exxon is involved in the exploration, production, manufacturing, and sale of crude oil and natural gas. Exxon Mobil was once the largest company in the world by market capitalization, but has seen significant drop-off even though it remains over $330 billion.
Exxon has struggled over the last five years, with the price of oil seeing a major drop-off from over $100/barrel to a bottom of $27/barrel. As such, shareholders have seen almost no gain with only the consistent dividend to show for it. The new CEO Darren Woods, who has spent the bulk of his career at Exxon, has recently installed a strategy to invest for growth. This growth, which is fueled primarily by the recent tax reform savings, has lofty expectations of doubling the current level of earnings by 2025.
Check out our previous take on XOM here where we discuss the implications of the company entering 2018 on a positive note.
For 2018, Exxon had a very average start and is down 2.56%. The stock was up 4.38% for the month of January but in February the stock retreated to the tune of 13.24%. Since then, it has been trying to recover as it has been heading back to the even mark for the year. For the trailing one year, Exxon is slightly positive with a return of 0.49%. For the longer term, the stock is one of few that is down for the trailing five years with a negative return of 11.50%. Compared to its major competitor Chevron Corporation (CVX ), Exxon has underperformed. In the same three time periods, Chevron has outperformed with a year-to-date return of 0.04%, a trailing one year return of 20.28% and a trailing five-year return of 0.04%.
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Over the last five years, Exxon Mobil has had a serious decline in revenues with an average annual decline of 12.1%. However, 2017 looked to be a new beginning as the company posted its first positive revenue growth (of around 8.5%) in over five years. This is attributed largely to an increase in the price of oil, seeing the largest year-end price since 2013. 2018 has gotten off to the start that Exxon was looking for, beating expectations with revenues of $68.21 billion, which is 16% higher on a year-over-year basis. Analysts expect Exxon to continue its second year of positive revenue growth in 2018, with revenues expected to be at $306.64 billion or over a 25% increase. However, they expect 2019 to level off with estimates at $305.89 billion, equal to a 0.25% decrease from 2018.
On an earnings-per-share basis, Exxon has also struggled until last year as well. Over the trailing five years, Exxon had a negative earnings growth of 13.8%. However, like its revenues, its earnings last year saw a large gain of over 146% to $4.63 per share. The fourth quarter of 2017 saw a large increase of $1.97 per share thanks to the U.S. tax reform and improved Upstream results. Analysts expect Exxon to continue its earnings growth in 2018 with estimates of $4.85, an increase of 4.64%. However, 2019 estimates are reporting at $4.66 per share, a decline of 3.92%.
Exxon Mobil is one of the industry leaders in terms of quality when it comes to its overall integrated assets.
The company is broken down into three segments: Upstream, Downstream and Chemicals. The bulk of its earnings comes from the Upstream segment, which as of Q1-2018 had $3.5 billion in earnings. This segment, in particular, saw an increase of $1.2 billion on a year-over-year basis, thanks to a crude realization of $10.80 per barrel. Oil-equivalent production was equal to 3.9 million barrels/day, which was down 6% from the first quarter of 2017. This suggests that the price appreciation of oil alone is helping to sustain the growth for Exxon’s Upstream segment.
A highlight for the Upstream segment was in the development of the company’s U.S. unconventional acreage, which is progressing with 27 operated rigs in the Permian and four rigs in the Bakken. Both the Permian and Bakken unconventional production have experienced an 18% growth on a year-over-year basis.
The largest growth catalyst will undoubtedly come from the increase in crude oil prices. Although the stock has not yet paralleled the returns of oil since 2018, Exxon’s earnings certainly have. In the last three years, oil prices have seen great gains, with increases of 44.68% in 2016, 12.47% in 2017 and 13.11 for 2018 so far. As the price of oil increases, so does Exxon’s Upstream segment profitability, as seen by the last quarter results, wherein earnings increased despite a relative reduction in production volume.
The second growth opportunity is a longer-term play and not for the investor looking for immediate bankable gains. The CEO announced during the first quarter earnings call that, “We’re planning to invest over $50 billion in the U.S. over the next five years to increase production of profitable volumes and enhance our integrated portfolio, which is supported by the improved business climate created by tax reform.” With this statement, management expects earnings and cash flow to double from its 2017 levels by 2025.
Exxon Mobil stock has a yield of 4.05% and has a higher yield than the Major integrated oil & gas average of 2.87% and a higher yield than its competitor, Chevron, of 3.63%. The company pays its shareholders $3.28 per share on an annual basis. Exxon has always supported its shareholders with a consistent dividend, increasing it every year for the last 35 years in a row. With the company on track to see increases in revenues and earnings for 2018, expect Exxon to see a dividend hike for its 36th year in a row.
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Conversely, the largest growth driver is also the biggest risk with the downward decline of oil prices. Oil took a real dive after it was trading well over $106 per barrel to just below $27 per barrel in early 2016. Although it has seen a little bounce back with its current trading level of $68 per barrel, Exxon has not really seen the translation to its stock price yet. If oil decides to rapidly decline again, Exxon could be pulled along for the downward slide.
Overall, Exxon Mobil has had a very tough five years, with investors seeing almost no upside outside of the dividend. The company was clearly affected by the price of oil but has not yet reaped the benefits of the recent trend upward. Investors looking for a quick profit should look elsewhere, as Exxon’s stock has shown no relation to oil’s recent gains.
Investors looking for long-term gains, who are patient and looking to bank on management’s long-term goals, could benefit while being rewarded with a dividend paying over 4%.