Exxon Maintained At $81 Per Share After 2Q Earnings

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Exxon Mobil

Exxon Mobil (NYSE:XOM) recently announced its 2015 second-quarter results. The company’s earnings fell sharply because of lower price realizations, as the average Brent spot price for the quarter declined by almost 44% year-on-year due to oversupply. Exxon’s total second-quarter earnings declined 52% year-on-year, led by a significant fall in upstream earnings, partly offset by higher downstream and chemicals segment earnings due to thicker margins. Based on the recent earnings release, we are maintaining our price estimate for Exxon at $81 per share, which values it around 18.8x our 2015 full-year diluted earnings per share (EPS) estimate of $4.31 for the company. Below, we discuss the key fundamental trends driving our valuation estimate for Exxon. [1]

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Lower Oil Prices

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Lower oil prices have a significant impact on Exxon’s upstream earnings. According to the company’s latest annual SEC filing, a $1 per barrel decline in the full-year weighted-average realized price of crude oil results in approximately a $350 million negative impact on its upstream net earnings. This means that depending upon the overall lag (between fluctuations in spot prices and their impact on Exxon’s earnings because of the average tenure of pricing contracts), if oil prices (Brent) average around $59 per barrel for the full year, Exxon’s upstream earnings could decline by as much as $14 billion or 50%, compared to last year. We currently expect crude oil prices (Brent) to average around $63 per barrel this year and increase at a decreasing rate to around $97 per barrel by 2022. Our current forecasts for Exxon’s average price realizations and profitability are driven by this crude oil price forecast. [2]

Higher Production

Exxon’s net upstream (oil and gas) production has been relatively flat over the past decade. It actually declined slightly from over 4.21 million barrels of oil equivalent per day (MMBOED) in 2004, to 3.97 MMBOED in 2014. This has also been the case with most of the other large integrated oil and gas players, as they have been unable to add enough new production to more than offset natural field declines. However, going forward, Exxon expects to ramp up its net upstream production to approximately 4.3 MMBOED by 2017 as it progresses on its plan to add roughly 0.8 MMBOED (assuming an average 4% natural decline in production every year) of new production between 2014 and 2017. The company is banking on a number of new project start-ups to achieve this target. Most of these projects, including the liquefied natural gas (LNG) project in Papua New Guinea, the Kearl oil sands and the Cold Lake Nabiye expansion projects in Canada, and the development of Sakhalin-1′s Arkutun-Dagi field in the Arctic, have either come online recently, and are currently in the ramp-up stage, or are scheduled to start-up in the near future. These new projects boosted Exxon’s net liquids production by 0.132 MMBOED during the second quarter and are expected to fuel production growth for the rest of the year as well. [3]

Improving Sales Volume-Mix

Exxon’s total hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen, and synthetic oil, and natural gas. Liquids are generally more profitable to produce than natural gas because of higher price realizations.  Last year, Exxon sold liquids at an average price of around $85.40 per barrel, compared to just around $39.80 realized per barrel of oil equivalent (BOE) of natural gas. This is the reason why the company has been trying to improve the proportion of liquids in its production mix over the past couple of years. Last year, Exxon’s total liquids production increased by over 44,000 barrels per day, or almost 2% y-o-y, excluding the impact of the Abu Dhabi onshore concession expiry. On the other hand, its natural gas production declined by around 690 million cubic feet per day, or almost 5.8% y-o-y. For the first half of this year, the company’s total liquids production increased by almost 9% y-o-y, while its natural gas production declined by 3.6% over the same period. As a result, the percentage contribution of liquids to Exxon’s total hydrocarbon production has increased from 51.2% in 2012, to 55.5% currently. We expect the company’s volume-mix to improve further this year, as it expects to grow liquids production by around 7%, while natural gas production is expected to decline 2% year-on-year. [4]

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Notes:
  1. Exxon Mobil Corporation 2Q15 Press Release, exxonmobil.com []
  2. ExxonMobil 2014 10-K Filing, sec.gov []
  3. Exxon Mobil Corporation 2Q15 Earnings Presentation Slides, exxonmobil.com []
  4. Exxon Mobil Corporation 2015 Analyst Meeting, exxonmobil.com []