Oil and gas super majors aren't having an easy earnings season. Contributing to the gloomy outlook for the sector right now are slumping energy prices, sluggish global demand and shrinking chemical margins. Which is why investors aren't feeling particularly optimistic about ExxonMobil's (NYSE:XOM) third quarter earnings release tomorrow.
Analysts, on average, forecast a 19% decline in sales to $62.31 billion, while profit should slump more than 50% to $0.67 a share when compared with the same period a year ago.
To manage investor expectations, on Oct. 2, Exxon announced it will take a half-billion dollar hit from lower oil prices during the period. But a decline in profitability is far more concerning than the fall in oil prices this year, since it suggests that other components of ExxonMobil’s integrated business weren't able to lend a helping hand in this tough operating environment.
Its petrochemicals division is failing to help improve the bottom-line since the U.S.-China trade war weakened demand for plastics. In the second quarter, profits from this division dropped by almost 80% compared to the same quarter in 2018, the lowest point for this metric in years. Exxon characterized this as a temporary problem of excess capacity.
But according to RBC Capital Markets analyst Biraj Borkhataria, the current trend suggests a prolonged downturn in chemicals. And the Texas-based company, with its large chemical division, is more exposed on this front than other energy firms.
Shares Under Pressure
Since hitting their 2019 high of $83.49 in April, shares—which closed yesterday at $67.72—have fallen about 19%. During the same period, the benchmark S&P 500 has gained about 21%.
After the recent pullback, Exxon's dividend yield has benefited. It's now at 5%, much higher than its past five-year average of about 3.5%. The company pays $0.87 a share quarterly, which has grown over 5% per annum in the past five years.
Against this negative backdrop—in which the company is struggling to increase its output while its cash-cow chemical business is faltering—there is a little hope that Exxon will be able to show its performance in the short-run has been superior.
Nevertheless, we remain quite optimistic about the company’s future growth. The company's CEO, Darren Woods, is still betting that this is the right time to invest in growth. Woods has embarked on a $230 billion plan to revitalize the oil giant, targeting drilling opportunities around the world.
These include shale wells in West Texas, natural gas export facilities in Papua New Guinea, a string of giant discoveries in the South American nation of Guyana, and developments in Mozambique and Brazil.
What’s impressive about Exxon is that it’s the only large-cap U.S. oil producer whose cash flows cover dividends and a projected capital spending. We think that strength makes this stock a good candidate to buy and hold over the long-run.
As well, Exxon has increased its dividend each year, for more than 30 years in a row, despite operating in a highly volatile sector. This accomplishment says a lot about the quality of the company’s balance sheet.
Bottom line
Without doubt, with oil prices under pressure and its once lucrative chemical division now struggling, it's difficult to put together a bullish case for ExxonMobil in the short-run. That said, we believe Exxon is a long-term bet. Any post-earnings weakness should be viewed as an opportunity to take a position in the stock.