Big oil went to the tape on Friday morning. After what has been a very busy week of macroeconomic and quarterly earnings releases, not to mention a few key decisions regarding global monetary policy, both Exxon Mobil (XOM) and Chevron (CVX) posted their respective second quarter financial results.
I came in long Chevron (not large). That firm made news earlier this week and for the most part, matched expectations this morning. Speaking of this morning, I want to take a fairly deep look at the larger of these two by market cap, Exxon.
For the three month period ended June 30th, Exxon Mobil posted GAAP EPS of $1.94 on revenue of $82.914B. The earnings print fell roughly $0.07 short of Wall Street's per share expectations, while that top line number beat Wall Street by more than $2B. Yes, revenues did beat Wall Street. That said, revenue generation was down 28.3% from the blow-out year ago comparison.
As revenues were contracting 28.3%, total costs, expenses and deductions came to $71.258B (-21.5%), leaving income before taxes at $11.656B (-53.3%), and after taxes... net income of $7.88B (-55.9%). Keep in mind that Q2 2022 was a record quarter. Though down huge from a year ago, these results represent the second best second quarter for Exxon over the past decade. Last year, oil and gas prices were positively impacted by an increase in post-pandemic demand that has then been exacerbated by Russia's uninvited military misadventure in Ukraine.
Production
Second quarter production dropped 3.3% to $3.608Mboe/day. That said, production in the Permian Basin is on track to increase 10% this year, printed at a record 622K boe/day, while production in Guyana increased to 400Kboe/day, also a record.
Capital and Exploration spending totaled $6.2B for the period, and now stands at $12.5B year to date. The firm indicates that this number is in line with its full year guidance of $23B to $25B.
Segment Earnings
- Upstream produced income of $920M (-43.6%) US, and $3.657B (-22.1%) ex-US.
- Energy Products produced income of $1.528B (-42.4%) US, and $782M (-70.1%) ex-US.
- Chemical Products produced income of $486M (-22.2%) US, and $342M (-24%) ex-US.
- Specialty Products produced income of $373M (+60.8%) US, and $298M (+61.1%) ex-US.
- Corporate & Financing produced a loss of $506M US, down from a loss of $355M (-22.1%) ex-US.
Guidance
The firm did not provide a lot in the way of specific numerical guidance as the market price for fossil fuels has been highly volatile. The firm does expect to generate higher upstream volumes on lower scheduled maintenance. As for the Energy Products segment, this will be the first full quarter without the Billings refinery, and here too, lower scheduled maintenance is planned. As far as corporate is concerned, financing expenses are expected to end up at $400M to $500M. The firm remains on track to deliver $9B of structural cost savings by the end of 2023 relative to 2019.
Earlier this month, the firm announced plans to pay around $4.9B ($89.45 per share) for Denbury (DEN) in an all-stock deal. Denbury is a Plano, Texas based carbon capture specialist, as the firm plans to build out and accelerate profitable growth in its Low Carbon Solutions effort. The deal is set to close late this year. Denbury owns the largest CO2 pipeline network in the US.
Fundies
The firm generated operating cash flow of $9.4B for the quarter, including a net working capital impact of $3.6B driven by higher cash tax payments. Ex-working capital, operating cash flow would have run at $13B. Free cash flow over the past three months including this impact was $5B. Over the first six months of the fiscal year, Exxon has generated operating cash flow of $25.724B, while spending $10.771B on CapEx.
After factoring in several other much smaller items, six month free cash flow ended up at $16.443B. Out of that, the firm paid out $7.439B in cash dividends to XOM shareholders, while repurchasing $8.68B worth of common stock.
Turning to the balance sheet, Exxon ended the quarter with a cash position of $29.557B and inventories of $24.249B in oil, products, merchandise, materials and supplies. Current assets in total added up to $91.76B. Current liabilities added up to $61.815B, including $3.929B in shorter-term debt. This puts the firm's current ratio at a strong 1.48. Sans inventories, the firm's quick ratio stands at 1.09, which is really quite good for a firm of this type and size.
Total assets amount to $363.248B, including just $17.479B in intangibles. Total liabilities less equity comes to $156.251B, including long-term debt of $37.567B. The firm has "other" long-term obligations of $21.095B as well. Of course, as a stickler, I would like to see these numbers reduced over time, even at the expense of returns to shareholders, but make no mistake: This large, complex balance sheet is in fine shape.
My Thoughts
Exxon Mobil continues to execute at a high level, even if on the way down from temporarily inflated asset prices. It would appear at least lately to this consumer that commodity prices, to include energy commodities, are for now on their way back up, though the US dollar appears to no longer be weakening against all of its peers.
The stock trades at just 11 times forward earnings, while yielding 3.45%. Chevron trades at 12 times forward earnings while yielding 3.78%. Hence, my reason for being over there for my exposure to the space.
That said, I do think Exxon Mobil is investible, and maybe an investor such as myself should split my energy allocation, which is far smaller than it was a year ago, between the two. Technically, XOM appears to be stuck in a three month basing period (or trading range) with a top end of about $109 and support at about $100.
This might present at least a little bit better than CVX, which is currently attempting and possibly failing to break out of an ascending triangle pattern, which is usually considered to be a bearish set-up.
My Plan
The plan is now to move a portion (up to half) of my long position in Chevron into Exxon maintaining the same level of exposure to the space. I will try to do this at a one for one money ratio, which currently means that I will have to buy 1.53 shares of XOM for every one share of CVX that I sell.
As for XOM, my pivot will be $109, with a target price of $125. My panic point will be $98, which will signal that support has broken. Whereas CVX is concerned, I look for support at the 50 day SMA (simple moving average)($156). Should I see resistance at the 200 day line, I'll peel off a portion of this long beyond what I sell in order to create a new long in XOM.
