Shares of Exxon Mobil Corp. (XOM, Financial) surged Friday, as the oil major reported better-than-expected revenues and earnings. This comes in as a much-needed respite for investors eyeing Exxon, as the company failed to beat Wall Street’s consensus for the last three quarters.
The company reported third-quarter revenues of $76.61 billion compared with Wall Street's consensus estimate of $75.68 billion and above $61.1 billion in the year-ago quarter. Earnings per share came to $1.46 compared with 93 cents in the year-ago quarter and above Wall Street’s consensus of $1.22.
The company recorded robust gains in its upstream segment, with net income from the division totaling $4.2 billion compared with $1.6 billion in the year-ago quarter. The uptrend in oil prices primarily drove the upside in gains realized from this segment. Also, downstream operations for the company recorded profits of $1.6 billion, up from $1.5 billion in the year-ago quarter.
But Exxon’s chemical segment dragged down the bottom-line growth, with gains of $713 million compared with $1.1 billion in the year-ago quarter. The lower profits were primarily recorded as a result of the commencement of turnaround activities in a chemical plant in Singapore.
Another development that cheered investors was the northern movement recorded in free cash flow. Exxon generated cash flow of around $12.6 billion in the quarter compared with $8.4 billion in the year-ago quarter, and returned $3.5 billion to shareholders through dividends.
“It was a quarter highlighted by strong operating performance, significant growth in liquids production, and considerable value from our integrated business model,” Neil Hansen, vice president of investor relations and secretary of Exxon Mobil said. “As a result, we delivered the highest level of cash flow from operating activities since 2014.”
From a competitive landscape perspective, Chevron (CVR, Financial) seems to have the upper hand when it comes to the overall dividend yield. While Exxon’s dividend yield of 4% is slightly more than that of Chevron’s, when including the yield from the latter’s buyback program of $3 billion, the overall yield for Chevron increases to 5.2%. The concern here? Exxon is not decided on restoring its buyback program despite its closest competitors pulling the trigger on theirs.
Exxon’s response might be to pile up resources for a prospective increase in cash flows in the coming years, owing to the projects in its pipeline. The company has multiple projects under its belt, with massive investments such as offshore Guyana and its integrated position in the Permian Basin and the Gulf Coast expected to start monetizing soon.
"We’re pleased with the increase in production from the second quarter of 2018 recognizing it reflects contributions from just one of our key growth areas, the Permian," said CEO Darren Woods. "We expect to continue to increase volumes over time as we ramp up activity in the Permian and new projects start up.”
From a valuation perspective, Exxon currently floats a forward price-earnings ratio of 14.18%, which is slightly above the industry median of 12.41%. This doesn’t seem like something to sweat about, considering the long-term view Exxon is known to take.
All told, while the concern with Exxon has always been the slow growth in production, this quarter’s results have shown that what matters is getting the most value per buck. Exxon proved to its investors sweating over the previous quarter’s results that through efficient operations and pricing, strong cash flows can be generated.
The highlight projects for the company will take time to monetize, hence investors should be looking at long-term value potential in the time frame of three to six years, and not worry too much about short-term results.
Disclosure: I do not own any of the stocks mentioned.
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