When you live by the sword, you die by the sword. In the case of Exxon Mobil Corporation (NYSE: XOM ), that sword happens to be crude oil and natural gas prices.
As one of the largest integrated energy stocks on the planet, XOM does have some advantages that other firms could only dream of. But in the end, Exxon Mobil's earnings come down to how much were they able to sell crude oil for during the quarter.
And it looks like XOM will do a tad bit more living when it reports earnings this Friday.
The key word in that sentence is "tad." While XOM shouldn't knock it out of the park, investors should get a nice surprise when the large energy reports this Friday. Albeit, several headwinds will keep the lid tight on XOM's potential.
For investors, it's still very much a wait, see and hold for XOM stock.
Good News for XOM Stock Holders
While it may be hard to remember - given the recent drops in crude oil - but oil spent much of 2016 and the beginning of this year rising higher. And that's just the thing. Earnings are a look at the past. For the last three months, XOM should be able to build on its fourth-quarter pop in profits.
Over the last quarter, prices for crude oil have averaged $52 per barrel, while natural gas prices have come in at an average of $3.29 per thousand cubic feet. That's sequential higher than Exxon's previously reported quarter. But what is really exciting for Exxon is that this average selling price is more than double what crude oil was selling for last year at this time. If you remember, the first quarter of 2016 was when the oil glut got particularly bad. We finally hit bottom at $26 per barrel during that time.
That reported quarter was the worst earning announcement for XOM in recent history and was actually a loss for the integrated energy giant. So when looking at the year-ago period, Exxon is sitting pretty. A 50% jump in crude oil prices is only going to help improve things. In fact, the average selling price should help Exxon Mobil's Upstream division to be profitable for the quarter.
Overall, Exxon is estimated to earn 86 cents per share on the back of higher oil prices. This will be roughly double last year's report and last quarter's - which included those major impairment charges.
Still Plenty of Bad at Exxon
The thing to remember is that higher oil prices are a two-way street. For XOM stock, that spells trouble for one of its other divisions.
Thanks to a rising glut of gasoline and the higher feedstock costs - both crude and natural gas - refining haven't exactly been that great of a sector to operate in. Crack spreads and margins have been pressured over the past few months. For Exxon, that's a slight problem.
Refining has been Exxon Mobil's savior during the past year, as it was able to take full advantage of lower realized crude oil prices. XOM was able to push more oil through its system and as a result, downstream was responsible for the vast bulk of its earnings during the downturn.
That dynamic has changed for the worse.
Refining has already struggled . Last quarter, XOM's downstream segment reported an 8% drop in earnings versus the fourth quarter of 2015. That drop was also a 1% decline versus Q3 of 2016. And things have only gotten worse this quarter with the larger glut of gasoline and higher feedstock costs.
The refining segment will put a damper on Exxon's overall earnings picture.
Also putting a damper could be the fact that Exxon made a ton of money through asset sales during the previously reported quarter. Those gains were pretty absent during the first three months of the year and if anything, XOM spent more money on acquisitions - such as its big buy in the Permian . Higher capex spending and buyouts could pressure the overall profit picture at Exxon Mobil.
Another Wait-and-See Quarter for Exxon Stock
In the end, XOM should be able to show some really earning improvements over a year ago and even last quarter. And that should make long-term shareholders who stuck with the integrated energy stock happy.
Exxon's earnings shouldn't be the kind of "knock it out of the park" reports that Exxon became known for, however. Shareholders may have to wait a bit longer for higher oil prices to really overcome the drops in Exxon's refining segment.
All in all, XOM stock continues to be wait-and-see play for investors. At least, there should be a dividend increase to cheer about, if history is any guide.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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