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Morningstar | Exxon Shows Benefit of Integrated Model in 3Q; Cash Flow Improves

Exxon posted a strong third quarter that reflected the strength of its integrated model. Earnings increased 57% to $6.2 billion from $4.0 billion last year largely on higher earnings from its upstream segment. Upstream earnings increased to $4.2 billion from $1.6 billion last year on higher oil and gas prices. Production growth remains elusive with volumes falling 2.4% to 3.8 mmboed from 3.9 mmboed last year. Excluding entitlement effects and divestures, however, liquids volumes were 6% higher demonstrating the shift to higher value liquids that should continue to play out in the coming years and result in margin expansion. Permian growth was particularly strong, registering a 57% year-over-year growth in volumes.

In contrast to most of its peers, Exxon reported an increase in downstream earnings to $1.6 billion from $1.5 billion last year as it was able to capture North American crude differentials to offset weakness in fuel margins. The ability to offset weak price differentials in upstream assets in Canada and the Permian through physical integration with downstream assets is a key element of differentiation for Exxon. It should continue to serve it well over the next year as differentials remain wide due to lack of pipeline capacity. Chemical earnings were a source of weakness falling to $713 million from $1.1 billion last year on lower margins and maintenance activity.

Importantly, Exxon reported strong cash flow during quarter after several quarters of relatively weak figures. Operating cash flow increased to $11.1 billion from $7.5 billion last year and $7.8 billion in the second quarter. Capital spending increased slightly, but guidance remains unchanged at $24 billion plus $1 billion-$2 billion for acreage additions in Brazil. Our fair value estimate and narrow moat rating are unchanged.

Despite an increase in free cash flow and relatively low levels of debt, management is likely to continue refraining from repurchasing shares in contrast to peers. As laid out earlier this year, investment in growth, with steady dividend increases, to double earnings and cash flow by 2025 remains the priority. We continue to think the strategy is sound, although the long duration of the story means investors could be waiting as Exxon lacks for near-term catalysts. That said, we see the shares undervalued at current levels.


Please see our latest report, “Integrated Oils: A Free Cash Flow Story,” published Sept. 4, for more.