Exxon Mobil 2Q'16 Results: Are They As Bad As They Appear?

The world's largest publicly listed oil and gas company, Exxon Mobil ( XOM ), lost almost $18 billion of its market capitalization since it posted disappointing June quarter 2016 results last week. The US-based company missed the consensus estimate for revenue as well as earnings by a huge margin due to the depressed commodity prices, coupled with weak refining margins during the quarter. This made the investors vary of Exxon's fundamentals, resulting in a 5% slide in the company's stock price.

Source: Google Finance

On a closer look, however, one can observe that Exxon's results were not as bad as the market reacted. Just like most of its peers, the integrated company had been offsetting its weak upstream performance with increased activity in its downstream segment over the last few quarters. However, the ramp up in refining production created a glut in the June quarter, causing the refining margins to shrink throughout the industry. Consequently, Exxon's downstream profits declined significantly compared to the last year.

But, even though the integrated company's revenue dropped significantly compared to last year, it improved notably on a sequential basis on the back of improved commodity prices during the quarter. In fact, the oil and gas giant recorded a jump of almost 40% in its pre-tax income on a sequential basis for the same reason. Yet, the company was unable to bring about a big change in its net income due to a heavy income tax charge in the quarter as opposed to a tax benefit in the previous quarter. Even then, Exxon's earnings for the quarter were much higher compared to its competitors, such as Royal Dutch Shell, Chevron, and BP.

On the cash flow front too, Exxon fared better than its counterparts, and maintained a cash balance position for the first half of the year. The company generated cash flows of $4.5 billion from its operations and realized $1 billion from asset sales. These proceeds were utilized to pay out dividends of $3.1 billion in the second quarter, representing a 2.7% rise from the second quarter of 2015. The company also cut down its capital spending to $5.2 billion, 38% lower compared to a year ago. But, due to the gap between its cash inflows and outflows, Exxon had to raise $5.1 billion of debt to finance some portion of its capital expenditure. However, since the company's debt ratio is amongst the lowest in the industry, any additional debt is unlikely to hamper the company's future prospects.

Exxon Mobil's Cash Flow Position For 1H'16

Source: Exxon's 2Q'16 Presentation

Overall, we believe that Exxon's second quarter performance, though lower compared to last year, recovered on a sequential basis due to an improvement in commodity prices. Also, the company is well placed to weather the current downturn with its high quality reserves, outstanding execution, and strong balance sheet. Thus, we figure that the market overreacted to the company's 2Q'16 earnings and penalized its stock, perhaps, more than was warranted.

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1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Exxon Mobil

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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