XOM’s earnings increased 50% yoy due to commodity price improvement and strengthened business performance. XOM remains focused on long-term value growth. Its integrated business has grown cash flow from operations and asset sales to over $20 billion year to date, an increase of over 40% compared to the first nine months of 2016. XOM continues to invest in new high-quality opportunities across the value chain but remains disciplined in capital allocation while delivering best in class execution.
Current Price: $83 Price Target: $86
Position Size: 1.6% TTM Performance: -1.5%
Thesis Intact. Key takeaways from the quarter:
1. Earnings were $4 billion in the third quarter, rising 50% from the prior year as commodity prices improved and business performance strengthened.
a. Upstream (production): earnings of $1.6 billion, an increase of nearly $950 million from the prior year quarter driven by higher realizations. Crude prices rose $6.50 per barrel versus a year ago and gas realizations increased by $0.60 per thousand cubic feet.
b. Downstream (refineries and distribution): earnings of $1.5 billion, up $300 million compared to last year, due to stronger refining margins.
c. Chemicals: earnings were $1.1 billion, down $79 million compared to prior year quarter. Weaker commodity margins driven by increased feed and energy costs decreased earnings by $200 million.d. Hurricane Harvey: because of planning and preparation, XOM was able to protect the infrastructure of its manufacturing plants and the chemical and refining plants are now back to normal. XOM estimates the hit to earnings was approximately $160 million, or $.04 in EPS for the quarter.
2. Exxon continues to use its balance sheet to deliver shareholder return through the cycle. New discovery, strategic acquisitions and key initiatives position the company for growtha. Current dividend yield = 3.7%. The pace of growth has slowed over the past two years b. XOM continues to conserve cash by reducing their buyback program – Exxon has spent more on share buybacks than any other company in the past 10 yearsc. Examples of recent portfolio strengthening include:i. a fifth offshore discovery in Guyana, with the successful Turbot Wellii. new acreage position in Braziliii. increased acreage position in the Permian basin, adding 22,000 acres that could add $400 million oil barrels of low cost resources
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