Exxon Mobil ( XOM ), the world’s largest publicly traded oil company, is expected to post a notable improvement in its March quarter earnings on 28th April 2017(( Exxon Mobil To Announce March Quarter 2017 Results , www.exxonmobil.com)), driven by the strong rally in commodity prices in the last few months. While the company missed its earnings expectations in the last quarter due to a one-time impairment charge, the analysts are optimistic about the company’s 1Q’17 results and anticipate the quarter to be one of the best for the company in over a decade. This is primarily because the commodity prices, that had hit their bottom in the first quarter of 2016, and have bounced back sharply after the production cuts by the OPEC in the last couple of months. Consequently, the integrated energy company’s upstream operations are likely to record a pronounced jump compared to the same quarter of last year. Further, the US-based company has shifted its focus on expanding its operations in the Permian Basin, which is considered to be one of the most prolific and economical shale plays in the country. Thus, we expect to witness a solid recovery in Exxon’s financial performance in this quarter.
Key Trends Witnessed in 1Q’17
The first three months of 2017 saw a surge in commodity prices, as the Organization of Petroleum Exporting Countries (OPEC) implemented the agreed production restraints, causing crude oil prices to trade in the $50-$55 per barrel range for most part of the first quarter. However, the crude oil prices dipped to under the $50-per-barrel mark in March due to rising US shale production and stockpile, bringing down the WTI oil price average to around $52 per barrel for the quarter. Yet, the oil prices were notably higher than the $33 per barrel average in the same quarter of last year. Thus, we expect to see a remarkable boost in Exxon’s upstream revenue as well as profits for the quarter.
Source: Google Finance; US Energy Information Administration ( EIA )
That said, Exxon Mobil is an integrated energy company and the recovery in commodity prices is likely to have a reverse impact on its downstream operations. The refining margins, that were thriving when the commodity markets crashed, started declining in the latter half of 2016, and are expected to be low for the 1Q’17 as well. Thus, the falling refining margins are expected to partially offset the impact of improving upstream operations in this quarter.
Despite this, the company remains focused on returning value to its shareholders, and has announced the 35th consecutive increase in its dividend. For the 2Q’17, the US-based company will pay a quarterly dividend of $0.77 per share, 2 cents higher from the dividend paid in the first quarter. This furthers the company’s willingness to share its improving profits with its stakeholders.
Exxon acquired an estimated resource base of 3.4 billion BOE in New Mexico’s Delaware Basin in the first quarter((Exxon Mobil To Acquire Companies Doubling Permian Basin Resource To 6 Billion Barrels, 17th January 2017, www.exxonmobil.com)) to ramp up its presence in the Permian Basin, which is known for its high quality oil and gas reserves, and competitive economics. The deal has doubled the company’s estimated resources base to roughly 6 billion BOE, making it one of the most prominent producers in the largest and most economical oil plays in the US. Post the closure of the deal, Exxon plans to add 15 more rigs, to its existing 10 working rigs, in the region, and expects to yield 30-35% higher margins from these assets compared to its other plays. With an increased resource base in one of the most profitable oil plays in the country, Exxon will have significant upside potential if and when the commodity markets bounce back.
Apart from this, Exxon announced a discovery of an additional high quality, deeper reservoir directly below the Liza field, with an estimated resource potential of 100-150 million barrels of oil equivalent ( BOE ). This resource discovery is in addition to the one billion BOE of recoverable oil already identified in the Liza Field. Further, the company plans to undertake the appraisal of the Liza-4 well later this year, which is likely to increase the recoverable resource base of the area to 1.4 billion BOE. Furthermore, Exxon has also received positive results from its Payara-1 well and Snoek well offshore Guyana in the last few months, which has reiterated investor confidence in the company. Consequently, the oil and gas company aims to ramp up its exploration and drilling activity in the region, and is anticipated to take an investment decision for the first phase of production by the end of this year.
Exxon’s Liza Field – Potential Production Trajectory of Phase 1 2
In addition to this, Exxon also laid down its plans to expand its manufacturing capacity along the U.S. Gulf Coast through planned investments of $20 billion over the next 10 years. The move is strategically motivated by the U.S. government’s stance of incentivizing the manufacturing sector in the country, and consists of 11 major chemical, refining, lubricant, and liquefied natural gas projects at proposed new and existing facilities along the Texas and Louisiana coasts. The project will be targeted toward export markets in Asia and adjoining areas, while generating around 45,000 new high-paying jobs and increased economic activity in the region.
Thus, we figure that the recovery in commodity prices will drive Exxon’a 1Q’17 results. Further, the company’s strategy to aggressively enhance its oil and gas reserves through focused explorations and acquisitions will enable it to be well-placed to leverage the further rebound in commodity prices in the coming quarters.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid Small Cap | European Large Mid Cap