Saturday, August 1, 2015

Dow Jone's Losers: XOM, CVX Earnings

Today is the start of a new month, a new month that will need to extricate the oil industry from the problems that July brought. To top it all off, Exxon-Mobil and Chevron introduced their earnings reports to a table already tilted against them. Sub-50 price levels overshadowed the prospect of a gain in income and as most experts predicted, disappointed numbers were in store. If investors looked back a year ago, they would find a prosperous company in XOM with earnings topping $8.7 billion. But a lot has changed, a July 31 conference call introduced a number that is below half of that, $4.19 billion. The drop can be attributed to low oil prices, a common poison administrated to the finances of national oil companies. A further look into the data behind XOM's earnings is provided with details about upstream and downstream earnings. XOM reported a $842 million dollars decrease in exploration and production earnings showing how the recent bottom has affected them. At the same time last year, upstream profits were $5.9 billion dollars higher at crude price levels that were twice as high. Exxon-Mobil also reported on various extraction projects outside of the United States. Romania and Kurdistan were two regions of note with discoveries being made in Guyana. Going further, XOM assured their investors of the efficient execution of operations in Erha North and Banyu Urip. Both of which capitalize on the opportunity to extract more oil to store as prices hopefully increase over time. At the same time, reports of a reduction in costs suggest that current spending is 30% less than a 2014 peak juxtaposed by a claim of "ongoing experience curve benefits." Basically, the sour message spoken by the numbers and charts are abetted by claims of "superior execution capabilities" and "capital discipline" attempting to dampen an unruly reaction by shareholders. Chevron's conference call fared not better, but perhaps worse if compared to the disparaging numbers posted by Exxon. Like Exxon, second quarter earnings for 2015 dropped to $571 million for Chevron, a $5.2 billion difference from the year before, because of low crude oil prices, but unlike XOM, singling out upstream income reveals a loss of $2.2 billion offset by almost $3.0 billion of downstream income. In response to troubling financials, CVX ensured their operations were running smoothly with progress in new projects around the world as well as accelerated drilling in the United States. Here is a summary of downstream and upstream earnings for Exxon and Chevron.

What does this chart tell us because anyone can see clear differentiations in the earnings reported by both companies? First of all, XOM clearly has superior upstream operations that allow them to make profits even during a slump. This will be crucial for ensuring that cash flow is available for reinvestment in times of financial discipline, and also provide hopes for investors looking to take a position in their stock. In fact, Exxon still has the option to continue expanding upstream production until they reach a break-even point which may be continually pushed farther away as costs are constantly reduced. This is the advantage of established infrastructure, a decrease of marginal cost because of economies of scale. Chevron, on the other hand, has shown that their upstream operations are not in control of price crises as exploration and production actually cost them the grand scheme of things. Nevertheless, their upstream operations can be maintained as long as profitable downstream operations compensate for the significant losses that are to come on the other side, and this seems plausible as fuel prices remain stable and refuse to move with crude. That brings me to a second point, even though CVX has shown an underperformance in its upstream sector, it should have strong enough downstream control that will capture profits no matter what. Everyone needs fuel. As the financial world chugs along, both companies should still be looking to maintain a desire to post consistent earnings results. If the slump lasts longer than a year (and it very well could per some experts), oil companies will need the support of shareholders to hold that stock price high. Posting consistent returns and grinding out margins by cutting out the extra fat in a company's operations is the way to stay disciplined in a drought. The feast comes later. As of now, I really like XOM's ability to sustain profits and its likelihood of efficiently cutting costs against other oil companies. Although the outlook for their stock is bearish in the short term, I see a bullish wave establishing them as the profitable giant after Q3 earnings come out. CVX is interesting because an initial bearish sentiment has them as losing in the big oil arena, but their stable downstream operations will allow them to secure more revenue on that end. In the long run, I'm a bull as they should be in the best position to capitalize on windfall profits when the downward pressure is lifted off of crude oil prices.

The numbers and data come from earnings material released by Exxon and Chevron on their investor relations pages:

No comments:

Post a Comment