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Morningstar | Exxon Posts Sharp Drop in Earnings, but Long-term Growth Plan Remains on Track

Exxon reported a sharp drop in first-quarter earnings from the year before, but nothing in the results indicate its long-term growth plans are in jeopardy or its competitive position is eroding. In fact, the drop was largely a result of a combination of difficult market environment and one-time issues that made year-over-year comparisons look especially poor. As such, we are maintaining our fair value estimate and moat rating.

First-quarter earnings fell sharply to $2.4 billion from $4.7 billion the same period last year due to weakness in the downstream and chemical segments. Downstream earnings fell to a loss of $256 million from a profit of $940 million as a weak refining margin environment including narrower crude differentials and poor gasoline margins was exacerbated by a high level of scheduled maintenance. While market condition have improved since the first quarter, second-quarter earnings will likely remain weak as Exxon continues a high level of maintenance activity in preparation of IMO 2020. Meanwhile, chemical segment earnings fell to $518 million from $1.01 billion last year largely on weaker margins and higher expenses for new assets. Like the downstream segment, chemical earnings will be negatively impacted in the second quarter by a high level of maintenance.

Upstream earnings fell to $2.9 billion from $3.5 billion largely as a result of impairments and absence of asset sales. Positively, volumes increased to 3,981 mboe/d from 3,889 mboe/d with liquids volumes increasing 5% as reduced downtime in Canada and Qatar and Permian growth (126% year over year) offset divestment impacts and lower European gas volumes due to weaker demand from warmer weather. Exxon’s long-term growth plans that call for an acceleration in growth beginning in 2021 lead by the Permian and Guyana with volumes growing to nearly 5.2 mmboe/d by 2025 remain intact.

Also, positively, operating cash flow only fell to $8.3 billion from $8.5 billion last year, although working capital was a benefit during the quarter ($1.3 billion). Also, it was insufficient to cover capital spending and dividends, we expect Exxon to be free cash flow positive for the year. Exxon also announced during the quarter a 6% increase in its quarterly dividend, although it did not repurchase any shares beyond those used to offset dilution. Asset sales were also light this quarter, but management indicated activity would be greater later in the year. Management is targeting $15 billion in assets sales over the next two years, the proceeds of which could be redirected toward repurchases.