Financial Analysis - ExxonMobil
Financial Analysis
Exxon Mobil Corp.
1Q was another tough result for XOM, with EPS/CFO both missing my model and lower CAPEX not enough to save the day, given the expectation of a big rest of the year ramp. As a result, the stock was down ~4% (after being down ~5% on 4Q EPS day, and S&P 500 +3%). Upstream production came in light, declining >6% y/y, due to one-time factors, but also PSCs, divestitures, and base decline rates. While management did not rule out buybacks, my estimate that the dividend coverage breakeven could trend from mid-$50s Brent in 2018 to mid-$60s in 2019-20 makes this seem like a challenge. I lower my Dec-18 price target to $81 (from $83) and remain Neutral.
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1Q earnings and CFO still choppy, but helped by lower CAPEX for now. XOM missed on earnings ($1.09, $1.15), despite 9c of tailwinds from asset sale gains, driven by misses in Upstream (5c/share) and Chemicals (5c/share). CFO also missed my estimate by ~$800mm, or ~$1.8B, excluding working capital. However, cash CAPEX beat ($3.3B vs. e $4.9B), in part due to the timing of the Brazil acquisition spending slipping into the second quarter.
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Production weakness partially explained, but the bar looks high to the 4mmboe/d FY guide. Overall production was down nearly 7% y/y, with liquids declining by 117kbpd y/y, stemming from the divestiture of the company's operating assets in Norway, normal field decline, and PSC effects. On a q/q basis, production declined 35kbd (factors included Syncrude, Kearl, Norway divestitures, and PSCs). Natural gas production volumes were down 870mcfd y/y and down 403mmcfd q/q; with y/y declines driven by weaker production volumes in the US and downtime at PNG LNG as a result of the earthquake (~25kboe/d, or ~150mmcfd). With production coming in at 3.889mmboe/d for 1Q in what is typically a seasonally good quarter (2Q/3Q have maintenance), I am cautious about XOM's ability to hit its 4mmboe/d guide (~3.9mmboe/d), particularly in a higher price environment.
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Buybacks not off the table, but dividend coverage breakeven elevated. While the 2018E implied breakeven to cover the dividend is currently at ~$55/bbl Brent, the guided increase in 2019-20 CAPEX raises the bar into the mid-$60s, which I think will make it difficult to entertain a buyback, particularly if oil prices show just a modest retreat from currently high levels. In my view, the buyback could only be reinstated for a sustained period if Brent prices were >$70/bbl.
Table 1: Income Statement - Annual
Table 2: Income Statement - Quarterly
Table 3: Balance Sheet & Cash Flow
Table 4: Ratio Analysis
Table 5: Sector data
Investment Thesis
According to the summary of financials above (Note: $ in millions (except per-share data). o/w - out of which. The fiscal year ends Dec.), I remain Neutral. XOM has several differentiating defensive characteristics, including a top-tier FCF/dividend coverage ratio and below-average financial leverage, both of which are aided by its integrated model that delivers strong FCF from its refining and chemicals businesses. This should allow XOM to act relatively defensively in a potentially lower-for-longer oil price environment. XOM has faced declining Upstream production on a y/y basis for five straight quarters, which I think has been a weight on the stock. Thus, improved execution here will be key to share price upside, in my view. One additional lever to watch for XOM is acquisitions (e.g., recent Permian acquisition), as the opportunity to add inorganic reserves could grow as the cycle continues to play out, particularly if the E&P sector continues to struggle. On capital allocation, I believe XOM's dividend yield is reasonably attractive; however, I do not expect buybacks to be reinstated in the near to medium term, which could limit investor urgency to buy shares.
Valuation
I lower my Dec 2018 price target of $83 to $81. My Dec 2018 price target of $81 is based on a target FY22E sustaining FCF yield of ~5.5%, in line with historical averages and below those of similarly levered US peers (implies a ~4.3% dividend yield target), reflecting XOM's best-in-class free cash flow profile and balance sheet strength. The implied total return upside potential is 4% vs. the NA group 6%.
Risks to Rating and Price Target
The primary upside risks to my price target and Neutral rating include:
- Oil prices and US natural gas prices rebound;
- Production growth gets back on track;
- Margin improvement beats expectations;
- Favorable acquisition;
- Share buybacks.
The primary downside risks to my price target and Neutral rating include:
- Oil price expectations decline below the forward curve;
- International gas prices remain at current low levels;
- Production continues to disappoint;
- Margin/mix improvement progress fades;
- Balance sheet re-levered for an expensive acquisition.
Disclaimer
The information contained herein does not constitute investment advice or an offer to sell or the solicitation of any offer to buy any securities of Exxon Mobil Corp or any other security.