Exxon Mobil Disappoints in First Quarter
Sky-rocketing oil prices have become a proverbial “hot-button” issue in this election year. The average cost of a barrel of oil was over $100 in the first quarter compared to just $58 in the first quarter of 2007. Consumers are frustrated by the prices at the pump, and businesses are feeling the pain too with increased energy costs. That is unless your business is energy, as this week oil companies such as BP (BP) and Shell (RDS.A) have reported huge 1st quarter profits and earnings. However, Exxon Mobil (XOM) released earnings that account for the second best quarter in the company’s history but were below analyst estimates, and the stock of the world largest company is down nearly 4%. Exxon had the misfortune of trying to live up to its record breaking 4th quarter 2007, but a drop in production and tougher conditions in the oil refining industry have made that an unrealistic goal.
The drastic rise in oil prices accounted for an increase in net income of 17%; net income per share was $2.03 and fell short of the $2.13 consensus estimate. The difference between the estimates and reality could be from an underestimate of how much drilling and production costs have increased. Exxon’s refining division was also a dreary spot as refiners squeezed their profit margins in a price battle. The Refining and Marketing divisions’ earnings were down nearly 40%. Furthermore, Exxon was not able to keep pace with past oil production numbers as they were only able to produce 90% of their production marks of 1Q last year. The seizure of some Exxon assets in the nationalization of Venezuela last year hurt, but production was also down in the U.S., Canada, and Africa. In an effort to ramp up production while the price is high, Exxon has increased its exploration budget 30%.
Exxon had enjoyed a very nice run prior to this report and the stock was up about 17% in the last year, compared to the Dow Industrials which are down more than 1 percent. Experts of the oil industry do not anticipate oil prices to fall substantially any time soon, and that should mean more good quarters ahead for the oil and gas behemoth. As a sign of confidence, management is increasing the dividend 14 %, which makes it 26 straight years of increases. Exxon is also continuing its planned share buy-backs as well. We believe that the stock is properly valued, and we have a rationally expected price range of $86-$101. The stock is selling with its historically normal ranges for price-to-sales and price-to-cash. Ockham Research would normally rate XOM a Hold given the current valuation, but given the overbought nature of the energy sector (IYE) our risk management metric has kicked in and downgraded each security within the sector. So, Exxon though fairly valued, is a Sell for the time being until the overbought condition clears.
As a quick note, oil companies will likely continue to have large profits and gasoline prices will stay high in the foreseeable future. As these topics will continue to grab headlines, there is a good chance that Congress will again take up the issue of a “windfall profits” tax. It does not take a deep understanding of how corporations work to know that the CEO’s and Board Members will not be the only one’s hurt by such a tax. It will be the owners of the company, many of which are average investors who happen to own XOM stock. In short, such a tax would not help the average citizen at the pump, but it would hurt the stock and its owners and is something that investors should be wary of.
Ockham Research Staff @ May 1, 2008