Higher Price Realization Will Likely Aid Exxon Mobil’s Near Term Performance

by Trefis Team
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Exxon Mobil (NYSE:XOM) recently posted its Q1 results, which were below the street estimates, due to a lackluster performance  of its downstream operations. The stock price reacted negatively with roughly 4% cut, post-earnings announcement.  The company’s upstream business did well, as expected, given higher price realization for its liquids. However, the chemicals business struggled, as higher realizations were offset by increased feedstock costs. We continue to believe that the company’s near term growth will depend on its upstream business, which will likely move higher given the recent trend in the oil prices. Separately, the company recently announced its acquisition of Indonesian lubricant firm, Federal, in a $436 million deal. We have created an interactive dashboard on Exxon Mobil’s expected performance for 2018. You can adjust the revenue and margin drivers to see the impact on the company’s performance.

Expect Crude Oil, NGL, And Other Upstream Business To Drive Near Term Growth 

We estimate the Crude Oil, NGL, & Other Liquids segment revenues to grow in low-double-digits in 2018. While we don’t expect much change in the production, the average crude oil and NGL sale price is estimated to see a 15% jump to $56. This is slightly  lower than the company’s first quarter realization of $60 for the U.S., and $58 for Non-U.S. crude. Our forecast is based on the recent trend seen in oil prices. OPEC continues to be committed to production cuts through the end of the year. This will likely aid the growth in oil prices. Furthermore, recent tensions in Syria, over alleged use of chemical weapons, and the turmoil in the Venezuelan economy, have further pushed the prices higher to $68 levels (WTI).

Looking at the company’s downstream operations, lower refining margins weighed on the segment earnings, which otherwise benefited from lower operating expenses in Q1. The company in Q4 2017 announced its plans to reorganize its downstream operations by integrating its refining and supply division with its fuel and lubricants business. This will aid the company’s downstream profits by streamlining the operations and improving decision making. Having said that, we do not expect much change in downstream revenues, and forecast it to be around $221.6 billion in 2018. This can be attributed to the overall demand, which we do not expect to rise in the near term. In fact, the company’s Q1 earnings were negatively impacted by the volume mix due to lower seasonal demand, as stated by the company’s management.

Overall, we now expect the company to post earnings of a little under $4.10 in 2018. We forecast a TTM price to earnings multiple of 20x by the end of 2018, which is slightly lower than most of the estimates for the sector, to arrive at our price estimate of $81 for Exxon Mobil. This implies a premium of around 5% to the current market price.

 

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