Exxon Mobil’s Stock Continues To Plunge Despite Improvement In 3Q’16 Earnings

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Exxon Mobil‘s (NYSE:XOM) stock dropped almost 2.5% soon after the company reported its third quarter 2016 financial results on 28th October 2016 [1]. While the US-based integrated company reported a sequential improvement in its earnings due to the recovery in its upstream operations, the market penalized the world’s largest publicly listed oil and gas company for missing the consensus estimate for both revenue and earnings by a notable margin. The investors had reprimanded the company in the last quarter as well, for missing their expectations, despite the company showing strong signs of improvement and recording better earnings compared to its rivals.

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Source: Google Finance; US Energy Information Administration (EIA)

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Key Highlights of Exxon’s 3Q’16 Earnings

Although Exxon’s upstream production declined close to 3% in the September quarter, the company’s price realization improved significantly due to the rebound in commodity prices in the quarter. The natural gas realized price grew more than 50% on a quarter-on-quarter basis, and 10% on a year-on-year basis, while crude oil prices improved sequentially but were lower compared to the third quarter of 2015. Consequently, the energy company’s third quarter revenue stood at $58.7 billion, nearly 2% higher on a sequential basis. However, the revenue remained depressed compared to the same quarter last year, as the commodity prices continued to be much lower than last year.

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Even though the revenue did not increase significantly, the energy company was able to reduce its operating costs drastically. As a result, the oil and gas giant’s pre-tax income jumped by almost 35% compared to the previous quarter. Further, Exxon managed to bring down the positive impact of margin improvement to its bottom line due to lower tax obligations, unlike last quarter. Thus, the company posted net earnings of $2.6 billion, or $0.63 per share in the third quarter of 2016, compared to $1.7 billion, or $0.41 per share in the third quarter of 2015.

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Unlike some of its peers, Exxon continues to pay a quarterly dividend of 75 cents, 2.7% higher compared to the same quarter of last year. Further, the company restricted its third quarter capital spending to $4.2 billion, 45% lower compared to a year ago. In terms of cash flows, Exxon’s continued to maintained a positive cash balance position for the first nine months of the year. Year-to-date, the company has generated cash flows of $14.7 billion from its operations and realized $2.2 billion from asset sales. These proceeds were utilized to finance the company’s capital spending needs and dividend payment. However, since the company’s debt ratio is amongst the lowest in the industry, any additional debt is unlikely to hamper the company’s future prospects.

Exxon Mobil’s Cash Flow Position Year-to-Date

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Source: Exxon Mobil’s 3Q’16 Presentation

Acquisition Update

Last quarter, Exxon Mobil had announced the acquisition of InterOil Corporation for a deal value of more than $2.5 billion, in an all stock transaction. The acquisition is likely to provide the company access to InterOil’s resource base, which includes interests in six licenses in Papua New Guinea covering about four million acres. The two companies are awaiting the outcome of a shareholder appeal in the court, approving the transaction.

Reserve/Project Update

Exxon announced that the Liza-3 appraisal well in Guyana, was successfully completed in October, whose results confirmed a world-class resource discovery in excess of 1 billion oil-equivalent barrels. In addition, the Owowo-2 and 3 exploration wells, located offshore Nigeria, also confirmed a discovery of 500 million to 1 billion barrels of oil. These discoveries are likely to enrich the company’s already strong reserve base and enable it to rebound faster as and when commodity prices recover.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Exxon Mobil

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Notes:
  1. Exxon Mobil Announces Third Quarter 2016 Results, 28th October 2016, www.exxonmobil.com []