Exxon More Than Doubles Its 1Q’17 Earnings; Continues To Enhance Portfolio Through Acquisitions

As anticipated by the market, Exxon Mobil (NYSE:XOM), the world’s largest publicly traded oil company, posted stellar earnings for the 1Q’17 last week((Exxon Mobil Announces March Quarter 2017 Results, 28th April 2017, www.exxonmobil.com)), on the back of improved upstream price realization and better-than-expected refining margins during the quarter. The integrated energy company reported net earnings of $4 billion, or $0.95 per share, more than double its earnings in the same quarter of last year, exceeding the consensus estimate by a notable margin. Consequently, the company’s stock shot up by 1.5% to $82.49 per share on 28th April, soon after it announced the March quarter results. Going forward, the US-based company will continue to focus on expanding its acreage in high-potential regions such as Permian Basin, Papua New Guinea, and the US Gulf of Mexico. Thus, Exxon plans to invest money to pursue strategic acquisitions and/or partnerships to build a robust portfolio that can generate industry-leading margins and returns.

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Operational Highlights

Due to the implementation of production cuts by the OPEC in the first quarter of 2017, the global crude prices increased more than $19 a barrel versus the year ago quarter, and natural gas prices recovered nearly $1 per thousand cubic feet (Mcf) during the same period. In line with this global recovery in oil and gas prices, Exxon Mobil witnessed a sharp rise in its upstream price realizations for the quarter, resulting in a sizeable improvement in its upstream revenue. However, the company’s upstream production, particularly crude oil, dropped over 8% in the quarter due to lower entitlements and increased maintenance, which partially negated the positive impact of higher realizations. Hence, the company’s revenues for the quarter stood at $63.29 billion, which though 30% higher than the March quarter of 2016, fell short of the analyst expectations for the quarter.

That said, in terms of profits, Exxon Mobil experienced a solid performance from all three of its business divisions. While the upstream earnings were driven by a stronger pricing environment, the downstream operations emerged as the dark horse, posting improved operational efficiency and better-than-anticipated refining margins, translating into higher profits. While some portion of this improved earnings was offset by the weak performance of the company’s chemical operations, and higher corporate and financing expenses, the oil and gas major managed to lift its net earnings to $4 billion as opposed to $1.8 billion a year ago.

On the financial front, Exxon continued to outperform its peers by generating impressive cash flows in the latest quarter. The oil and gas giant generated $8.9 billion from its operations and asset sales, which were more than sufficient to cover its capital spending needs of roughly $4.2 billion, and quarterly dividends of $3.1 billion. Just to recap, the company’s Board had increased the second quarter dividend payment to $0.77 per share, 2.7% higher than the previous quarter, marking the company’s 35th consecutive dividend growth. However, Exxon continued to limit its share repurchases to amounts needed to offset dilution related to its benefit plans and programs, and refrained from additional share purchases to reduce shares outstanding.

The Way Forward

Given the improving outlook of the commodity markets, Exxon has been proactively pursuing its expansion plans by either acquiring high-margin acreage, and/or by entering into joint ventures or agreements with other producers to explore and develop these plays. To this effect, Exxon closed two of its major deals – the InterOil deal in Papua New Guinea (PNG), and the Permian Basin deal – in the March quarter. While the company is engaging with co-venturers to assess optimal development of acreage in the PNG region, it has set up an integrated asset team to manage these newly acquired Permian property.

In addition to this, Exxon Mobil agreed to acquire a 25% indirect interest in the natural gas-rich Area 4 block, offshore Mozambique, for a cash consideration of $2.8 billion. The deepwater Area 4 block is estimated to hold more than 85 trillion cubic feet (Tcf) of natural gas, with high expected well deliverability, underpinning a world-class LNG project. The project, once operational, will be well positioned to supply LNG customers in markets around the world. Exxon will lead the construction and operations of the planned onshore facilities, including liquefaction trains with capacity of up to 40 million tons per annum.

Exxon Acquires 25% Interest In Area-4 Block, Offshore Mozambique

Source: Exxon Mobil 1Q’17 Presentation

Furthermore, the company currently has 18 major projects in execution across all business segments. In terms of upstream pipeline, the company has projects such as Hebron and Odoptu Stage 2, that are commissioning well and are expected to start up before the end of this year, adding a combined gross production capacity of 215 kbpd. On the downstream side, the Antwerp coker project (delivering higher value products such as ultra-low sulfur diesel) and the chemical expansion project at Baytown and Mont Belvieu will begin a phased startup in the second half of the year.

Thus, in order to explore its existing as well as newly acquired acreage, the company expects to spend around $22 billion in capital expenditure in the current year. The majority of this expenditure will be focused on high-margin, short cycle shale projects in the US, mainly in the Permian Basin and the Bakken formation.

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