Exxon a Better Buy after Earnings
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ExxonMobil (NYSE: XOM) recently saw its rating downgraded by Deutsche Bank from buy to hold, reflecting increased market pessimism about the supermajor’s exposure to natural gas prices and reduced refining outputs. While I think this is a solid concern and will absolutely lead to lower earnings for the firm this quarter, ExxonMobil still has high-quality business opportunities, and in greater numbers than in the competition, to help blunt losses in the long term.
Success in Chemicals, Downstream Divestitures May Help Hedge Losses Elsewhere
ExxonMobil’s Saudi Arabian chemicals arm recently entered into a joint venture with Saudi Basic Industries to build a massive $3.4 billion specialty elastomers center, which could come online as early as 2015 and produce 400,000 tons of rubber annually, in addition to other consumer products. This venture will add to ExxonMobil’s revenues at about the time natural gas prices are expected to increase, giving the firm a better long-term outlook.
Its Lubricants and Petroleum Specialties Company division is also receiving a boost, thanks to a commitment by Group 1 Automotive to prominently display and recommend Mobil and ExxonMobil engine oil equipment and products as a preferred supplier. ExxonMobil will provide marketing support including company-branded materials at the 111 Group 1 dealerships in the U.S. I believe this direct-to-consumer advertising will enhance ExxonMobil’s position as an upscale vehicle oil supplier, and lead to greater revenues through consumer-branded products.
ExxonMobil may be looking to sell its Esso branded gas station chain in Germany in a deal that could be worth $1 billion. ExxonMobil is in preliminary talks over a deal with internationally based firms, according to unidentified sources quoted by Bloomberg. As part of its strategy ExxonMobil is divesting filling stations in markets where demand is low in order to focus expenditures on new developments and chemical production, with its total number of stations dropping 33% since 2007. I don’t anticipate that divesting Esso would have a negative impact on ExxonMobil, since its fueling stations in other countries with higher rates of vehicle ownership are what really drive its profits in this business area.
Australian Challenges Push Back Production – Again
ExxonMobil’s Bass Strait, Australia oil projects are facing yet another challenge as extensive mercury contamination will require ExxonMobil and its partners on the Kipper and Turrum projects to bring in mercury removal equipment. The projects are already far above budget, standing at $4.4 billion, almost twice the initial budget of $2.7 billion.
In a statement, ExxonMobil indicated that Kipper construction will be completed this year, but the installation of dedicated mercury removal equipment will push production back to 2016. Turrum should be producing in early 2014. However, these later production dates may give gas prices a chance to stabilize, meaning higher realizations for ExxonMobil in the end.
Riding Out Political Infighting in Iraq
ExxonMobil’s first mover lead into the autonomous Kurdistan region in Iraq is being followed by Chevron (CVX), which is causing international discussion and receiving criticism from many corners. The central government of Iraq is looking to manage oil production and export for all of its regions, with ultimate power to approve or deny any plans, and believes that deals with Kurdistan are against its laws. Iraq’s Prime Minister Nuri al-Maliki is calling on the U.S. government and President Obama to put a halt to American producers’ plans to export oil from the politically sensitive region. In a statement, the Obama administration advised “American energy companies doing business to consider the legal risks involved in signing deals with a region against Baghdad’s wishes…. That said, in our economic system, private companies make their own business decisions.”
Those business decisions could have consequences outweighing the benefits. Iraq could cut supply to firms that continue to do business with Kurdistan, a move that would cut into the bottom line more deeply than simply barring firms from participating in Iraqi oil and gas development. Because of its deal with Kurdistan, ExxonMobil was in fact recently barred from participating in an auction for exploration acreage held by the central Iraq government.
Despite the risks, Total (NYSE: TOT) is also indicating interest in Kurdistan, as is Statoil (NYSE: STO), possibly because the deals Kurdistan is offering provide greater profit sharing than the deals held out by the Iraqi government.
Outlook
Earlier this month, S.J. Sherman Glass, president of ExxonMobil Refining & Supply Company and vice president of ExxonMobil announced his retirement effective Aug. 1. As high-quality oil from U.S. shale production reduces producers’ needs for heavy crude refining capacity, the next leader of ExxonMobil’s refining arm will need to move quickly on new strategies; its refining profits are already razor thin, at about 1.3% in 2011. According to Business Wire, D.W. Darren Woods, vice president of Supply & Transportation, ExxonMobil Refining & Supply Company, is the likely successor. As far back as 2009 when refiners’ margins began to feel a squeeze, Woods pointed to the cyclical nature of the industry as a reason not to take steps to blunt the impact. I think this viewpoint does not bode well for the world’s largest refiner’s profits.
ExxonMobil is trading around $86, which gives it a price to book of 2.6 and a forward price to earnings of 9.4. Its revenue growth and earnings per share are both sliding due to the multiple pressures, though its dividend was raised in the second quarter to 2.65%. There is talk that competitor BP (NYSE: BP) will follow suit and raise its dividend by 14% to $0.8 cents per share as it approaches its next declaration next week. There are also calls for competitor Royal Dutch Shell (NYSE: RDS-A) to increase its dividend.
Analysts are not optimistic about ExxonMobil’s second quarter earnings given the company’s widening exposure to low natural gas prices and lowered profitability in its refining activities. Though I agree that second quarter earnings will likely be lower than forecast, I think that ExxonMobil’s multiple oil projects scheduled to come online this year and next will provide relief in the short term.
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