Exxon: Stay Away From This Oil Major – Exxon Mobil Corporation (NYSE:XOM)


Investment thesis:

Exxon Mobil Corporation (XOM), one of the world's largest oil and gas companies, posted worrying results in the first quarter of 2019, despite the notable appreciation of the oil market price in the second half of the year. Compared to its peers, XOM is still overvalued, even if the shares are trading near the commercial support of $ 73. In this context and with the recent correction of the oil market, XOM should continue to suffer, after a downstream disturbance and a chemical compression.

Source: TradingView

Poor quarterly earnings and a rapidly changing oil environment penalized the creation of XOM value

From my previous note, the quarterly launch of XOM in the first quarter of 2019 disappointed, amid falling quarterly earnings, the increase in debt and the decrease in free cash flow. After surpbading badysts' earnings estimates in the last two quarterly releases and despite downward revisions to the consensus, XOM's earnings and revenues decreased, respectively, 60.8% (q / q) to $ 2.35b and 11.5% (q / q) to $ 63.62. In that sense, earnings per share fell to $ 0.55, which returned the company's profitability to the levels of early 2016, when oil markets were evolving to a minimum of a decade of $ 35 per barrel.

That said, during the first quarter of 2019, XOM seemed unable to adapt quickly to a rapidly changing crude environment and, despite declining operating costs, it dropped 7% (q / q) to $ 59.3b, the heavy XOM's cost structure did not compensate for significant revenues decrease from 11.5% (q / q) to $ 63.6b.

However, XOM's visionary investment approach should pay off in the long term; However, this occurs in an early period, characterized by the increase in oil volatility and growing commercial and geopolitical tensions. In fact, with the deceleration of cash flows from operations, a decrease of 3.1% (q / q) to $ 8.3b, weak sales of quarterly badets and a slight decrease in CAPEX, the FCF generation continues its movement to the loss, losing 5.6% (q / q) to $ 1.5b. In the future, high and untimely capital spending should continue to affect XOM's FCF generation, which I hope will continue to be limited in the short term, putting the company in a difficult position compared to its peers:

Source: Marketscreener.com

More importantly, the final balance of XOM was significantly reduced and net income was reduced by a huge 60.8% (q / q) to $ 2.3b, although oil equivalent production remained stable during the period, a decrease of 0.7. % (q / q) to 3981 koebd.

Given the boring earnings outlook, XOM investors have some reason to worry and I believe that the pressure of short sales initiated after the earnings release has not been left behind.

Despite the increase in crude production, the chemical business and downstream of XOM collapses

During the quarter, XOM results were affected on all sides. Profits by divisions decreased in all businesses compared to the previous quarter, after lower sales, hardening of oil cracks and increased maintenance.

The upstream division recorded the best result of its kind during the quarter, decreasing 13.2% (q / q) to $ 2.8b, despite a general improvement in the oil context, production volumes in line with the levels of the 4Q 2018 and a strong growth of Permian production, 19% (q / q) or 36 koebd. However, the lower volumes of oil and gas, the lower duties and the absence of favorable tax impacts of Q4 2018 for the only time fully compensated.

In addition, earnings in the downstream segment reported a net loss for the first time in the decade, both in US activities. UU As in the non-Americans. Despite (q / q) constant sales of petroleum products, they decreased marginally 1.5% to 5,415 kbd, XOM's profits decreased by an astonishing 109.5% (q / q), settling at a net loss of $ 0.25b a gain of $ 2.7b in Q4 2018. This impact is mainly due to lower margins, lower crude oil spreads, higher refinery scheduled maintenance and lack of divestment profits.

Finally, the chemical activity decreased significantly during the period, fell 29.7% (q / q) to $ 0.51b, amid the weakening of sales, decreased 9.9% (q / q) to 2,322 kt and thinner US margins, but it was partially compensated by less downtime and maintenance periods.

Looking ahead and given XOM's weak Q1 2019 report, I expect the company's bottom-up business to generate incremental growth in the short term, given the increasing exposure to the Permian and the improvement in crude oil prices. In addition, with the rebound of the refining margin in the US. UU., The shortage of storage of gasoline and distillates in the US. UU It is increasing and it is likely that the arrival of the peak driving demand in the summer will sustain the chemicals business and downstream of XOM. However, the significant scheduled maintenance of Q2 2019 in both divisions should partially compensate.

Source: EIA

Source: EIA


Despite the disappointing quarterly results, XOM's valuation is not reasonable compared to its peers and the market is still overestimating future upstream growth that will take several years to fully materialize. The tanker is currently trading at an EV / EBITDA ratio of 2019e of 7.53x, compared to only 4.77x for Total (TOT) and 4.6x for BP (BP), two of the largest integrated oil companies in the world. Similarly, 2019e P / E is also unattractive, with an implicit ratio of 18.4x versus 15.6x for Chevron (CVX), 10.1x for TOT and 13x for BP.

However, XOM's financial health remains comfortable, but the quarterly figures slightly deteriorated its leverage ratio, increasing to 0.77x in 2019, versus 0.6x in the same period last year.

However, the company still offers an interesting yield of 4.51% by 2019. However, European oil companies are delivering a slightly higher value to investors, with respective dividend yields of 5.49% and 5.71% for TOT and BP.

Source: Marketscreener.com

In this context, I expect the market to continue ignoring XOM, after the weakening of deliveries in the chemical and derivative business and an untimely investment strategy deployed in a volatile crude oil market. Having said that, I remain on the sidelines for the time being and I hope that XOM will go further south in the short or medium term.

I hope to read your comments.

Revelation: I / we do not have positions in any of the actions mentioned, and we have no plans to start any position within the next 72 hours. I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (except for part of Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

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