Exxon released 4Q17 earnings and cash flow below consensus expectations, driving the stock lower today. In addition, investors were expecting a share buyback announcement that did not materialize. The next catalyst for the stock is its March’s analyst day where a more detailed capital allocation plan will be released. We are maintaining our position size and price target.
Current Price: $84.5 Price Target: $86
Position Size: 1.97% TTM Performance: +1.2%
Thesis Intact. Key takeaways from the quarter:
1. Earnings were $19.7 billion in Q4 (+$11.9B), thanks mostly to US tax reform (+$6.6B), followed by Upstream realization (+$5.4B) and downstream margin improvement (+$732M)
a. Upstream (production): earnings up $9B thanks to tax reform and higher realizations. Volume down 3% on easy comps
b. Downstream (refineries and distribution): earnings up $323M due to tax reform and higher margins but offset by lower asset management gains
c. Chemicals: earnings up $398M due to tax reform and higher volumes
d. Cash flow flat y/y in a rising oil price environment and helped by asset sale proceeds
e. Rig count up in Permian Basin but some down time due to weather in Bakken, so production overall wasn’t up as much as expected compared to growth in number of rigs
2. 2018 comments
a. 2018 capex is guided to $24B, close to its long term average of $25B. This is above market expectations closer to $20B
b. No buyback announcement, which is a disappointment to investors
c. With cash, XOM wants to continue to invest in opportunities that are accretive, then continue growing its dividend. They will do some buyback if extra cash is available
d. Ongoing asset management program analyzes which asset to sell or keep as they mature, as company keeps its focus on returns
e. More detailed capital allocation plan will be released during the analyst day in March 2018
3. XOM receives a premium multiple relative to peers due to several differentiating defensive characteristics: 1) top-tier FCF/dividend coverage ratio and 2) below-average financial leverage
a. XOM trades at double the FCF yield of the broader sector and remains an important piece of our energy exposure (downside protection with some upside participation)
b. XOM offers less cyclical upside in an energy price rally but has protected better on the downside; driving better through the cycle returns
Thesis on Exxon (XOM)
• Strong balance sheet means the company can be opportunistic in current environment to drive future growth and profitability (acquisitions, div increase, buybacks)
• Large “Quality” business and Industry Leader = Best balance sheet and return on capital in the industry due to low production costs and high operating efficiency
• Low “beta” (less commodity sensitivity) name to reduce volatility of our overall Energy Equity exposure yet still participate in higher commodity demand/prices over time