Exxon Mobil’s Stock Plunges On Weak 4Q’16 Results; Expects Permian Basin To Drive Future Growth

by Trefis Team
Exxon Mobil
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After the disappointing results posted by its closest rival, Chevron (NYSE:CVX) last week, Exxon Mobil (NYSE:XOM) too posted lower-than-expected December quarter and full year 2016 financial performance earlier this week((Exxon Mobil Announces December Quarter 2016 Results, 31st January 2017, www.exxonmobil.com)), despite the upswing in commodity prices in the last few months. While the world’s largest integrated energy company showed some improvement in its top-line for the fourth quarter, it missed the consensus estimate for the quarterly and annual earnings by a mile. The key reason behind this earnings slip was a one-time impairment charge of $2 billion in the U.S. segment, largely related to dry gas operations with undeveloped acreage in the Rocky Mountain region. That said, the oil and gas major is optimistic about the recovery of the commodity markets, and expects to focus on expanding its operations, primarily in one of most prolific oil plays in the Permian Basin.


Key Trends of Exxon Mobil’s 4Q’16 Results

On the operational front, Exxon Mobil’s upstream production dropped 3% compared to the fourth quarter of last year to 4.1 million barrels of oil per day (Mboed). This was largely because of field declines, entitlement impacts and downtime in Nigeria, which was partially offset by the impact of higher production from new projects. In addition, the oil and gas producer’s downstream sales were also down compared to the same quarter in the previous year. However, due to the growing optimism in the oil and gas industry, commodity prices rose sharply during the quarter, causing the company’s crude realizations to increase by more than $8 per barrel. As a result, the US-based company’s 4Q’16 revenue grew to $61.02 billion, only 2% higher on an annual basis, missing the analyst expectations by a slight margin.


On the cost side, the energy company continued its relentless efforts to bring down its operating costs by both structural and operational efficiencies. Further, the rebound in its upstream operations, and higher refining margins in Europe and Asia, augmented the rise in the company’s profitability. However, due to the effect of the upstream impairment charge of $2 billion in its US segment, Exxon experienced a significant decline in its pre-tax income. The company reported pre-tax income of $617 million for the December quarter, as opposed to pre-tax income of $2.6 billion generated in the same period in the prior year. This low earnings was mitigated to some extent by a tax benefit of $1.4 billion booked in the fourth quarter, versus a benefit of only $202 million last year. Yet, the company was unable to meet the market expectations on the earnings front, and recorded net profit of $1.7 billion, or 41 cents per share, as against a profit of $2.8 billion, or 67 cents in the 4Q’15.


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

On the financial side, Exxon Mobil generated $7.4 billion from its operations, and $2.1 billion from the proceeds of its asset sale program. The company utilized these funds to meet its capital expenditure needs of $4.8 billion for the quarter, 35% lower on a year-on-year basis. Also, the oil and gas company paid dividends of $3.1 billion for the quarter. For the full year, the company’s annual dividends were 3.5% higher compared to 2015. In addition, the company recently declared a quarterly dividend of 75 cents for the latest quarter((Exxon Mobil Announces Quarterly Dividend, 25th January 2017, www.exxonmobil.com)). With a debt issue of $2.8 billion during the year, the oil and gas company managed to be cash positive for the full year 2016.

Exxon Mobil’s Cash Flow Position For 2016


The Way Forward

Going forward, Exxon Mobil will continue to focus on its long-term growth by executing on its investment plans. The majority of the long term growth for the company is likely to come from its operations in the Permian Basin. Earlier this year, the company acquired 3.4 billion barrels of oil equivalent in the Permian Basin for a sum of $5.6 billion in the form of shares and a series of additional contingent cash of roughly $1 billion, to be paid between 2020 and 2032((Exxon Mobil To Acquire Companies Doubling Permian Basin Resource To 6 Billion Barrels, 17th January 2017, www.exxonmobil.com)). The deal will further strengthen the company’s unconventional portfolio, adding high quality acreage in the Delaware Basin, and more than doubling its resources in the Permian to greater than 6 billion oil equivalent barrels.

Exxon Mobil US Unconventional Portfolio


Apart from this, the company had started production from five major projects during 2016, adding 250 thousand oil equivalent barrels per day (Kboed) of working interest production capacity. In the earnings call, the oil and gas producer commented that the construction activity for five other major projects was ongoing, and it expects these projects to come online in the next two years, contributing 340 Kboed of working interest production capacity. With the outlook for commodity markets improving, Exxon anticipates its 2017 capital and exploration expenditures to be around $22 billion. The company will share further details about the capital allocation in its Analyst Meeting on 1st March 2017.

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