Exxon Mobil: The Endgame Is Here
Contributor since 2015 / 6107 Followers
Summary:
- Exxon Mobil reported disappointing earnings results for Q2 as its revenues and profits missed the Street expectations.
- The company is likely to still generate decent profits in the following months, thanks to the growth of the U.S. economy and potential further oil production cuts by OPEC+.
- However, it’s unlikely that Exxon Mobil’s shares would be able to aggressively appreciate as several macro developments are likely to limit their upside.
Justin Sullivan/Getty Images News
Exxon Mobil (NYSE:XOM) reported disappointing earnings results for Q2, and it’s unlikely that its stock would be able to return to the all-time high levels that were reached at the start of 2023 due to the end of major supply disruptions that caused oil prices to skyrocket last year. While the overall growth of the U.S. economy along with the potential further cut of oil production by Saudi Arabia and its allies are likely to prevent a further depreciation of oil prices, the upside also appears to be limited.
Considering that the Chinese economy fails to fully recover to its pre-pandemic levels while the non-OPEC oil production is expected to increase in the following quarters, it’s likely that oil prices would remain at the current levels for the rest of the year. Therefore, even though Exxon Mobil would be able to generate decent profits in the coming months, I wouldn’t expect its shares to aggressively appreciate anytime soon due to the lack of major growth catalysts.
Is This The Bottom For Oil Prices?
Earlier today, Exxon Mobil reported its earnings results for Q2, which showed that the company generated $82.91 billion in revenue, down 28.3% Y/Y and below the estimates by $7.41 billion. At the same time, its non-GAAP EPS of $1.94 was below the estimates by $0.08. The decrease in revenues along with the inability to meet the street estimates was mostly due to the fact that oil prices in Q2 have been on a decline as the Brent crude oil traded below $80 per barrel for the most part of the quarter.
Despite such a disappointing performance in Q2, there are reasons to believe that the oil prices are unlikely to greatly depreciate further from the current levels, which would make it possible for Exxon Mobil to generate decent returns in the following quarters. One such reason is the better-than-expected performance of the U.S. economy. A month ago, revised numbers came in which showed that the GDP growth rate of the U.S. economy in Q1 was 2%, above the previous estimates of 1.3% thanks to the greater consumer spending and the improvement of exports. At the same time, just a few days ago the Bureau of Economic Analysis reported that the American economy grew 2.4% in Q2 thanks to improved business spending during the quarter.
In addition to that, the IMF recently upgraded its global growth forecast for the year, in which it noted that the global economy shows signs of resilience despite all the challenges and is expected to grow at 3% in 2023. Such an improvement in economic activity is likely to stabilize oil prices and prevent a price rout in the following months, which would certainly be in Exxon Mobil’s best interest.
At the same time, there’s also an indication that Saudi Arabia, along with its partners from OPEC+ won’t rule out additional oil production cuts in order to prevent a decrease in oil prices in the foreseeable future. Ever since October 2022, the Saudi-led efforts to cut oil production took off over 2 million barrels of oil per day from the market, which accounts for over 2% of the global daily oil production. This was done in order to ensure that members of OPEC+ continue to generate decent profits at a time when the demand was faltering. In May, the IMF reported that Saudi Arabia needs an oil price of $80.9 per barrel to balance its budget and avoid an annual deficit this year, which it already reported in Q1. To end the year with an overall budget surplus, Saudi Arabia alone decided to decrease its oil output by 1 million barrels per day in June, which it already extended in July for another month. As a result of this, Brent crude oil already trades slightly above $80 per barrel, which makes it possible for both Saudi Arabia and Exxon Mobil as well to continue to generate decent profits.
What’s Next?
While the developments described above are likely to prevent an oil price rout in the following quarters, there are reasons to believe that a major appreciation of prices is also unlikely to happen anytime soon. This is mostly due to the disappointing performance of the Chinese economy, which would likely keep the demand for oil lower than previously expected. The country’s GDP numbers for Q2 came in lower than forecasted and there’s a possibility that the official target for this year won’t be achieved as well due to the decrease of industrial profits that could lead to deflation in the future.
On top of that, there’s also an indication that more oil from non-OPEC countries is entering the market and undermining the Saudi-led efforts to keep production low. Even though Saudi Arabia was the second-biggest global producer of oil and its state-owned oil conglomerate Saudi Aramco produced on average 11.5 million barrels of oil per day in 2022, it is the United States that remains to be the biggest producer of oil with an average production of 11.89 millions of barrels of oil per day in 2022.
In the last couple of years, the United States has been increasing its oil production, and Energy Information Agency in its latest report stated that it expects the U.S. production to increase to 12.56 million barrels of oil per day in 2023 and to 12.85 million barrels of oil per day in 2024. Such a decrease is likely to diminish OPEC’s pricing power over the market and make the Saudi-led cuts more ineffective. As a result of this, the Energy Information Agency also expects the spot price for the barrel of Brent crude oil to average $79.34 per barrel in 2023, and $83.51 per barrel in 2024.
Therefore, despite all the upsides it seems that the oil prices are unlikely to return to last year’s highs of over $100 per barrel, which helped Exxon to generate record profits and its stock to jump to all-time highs. My latest DCF model from a month ago showed that the company’s fair value is $104.46 per share, which is close to the current market price and represents little to no upside at this stage. At the same time, the street expects Exxon Mobil’s revenues and profits to slowly decrease Y/Y in the following quarters, which also indicates that oil prices are unlikely to aggressively appreciate to new highs anytime soon.
The Bottom Line
Considering everything that’s been highlighted above, I remain neutral and have no position in Exxon Mobil at this stage. On the one hand, by aiming to decrease its production cost to as low as $35 per barrel in the following years, the company would be able to continue to generate decent profits at the current market price of ~$83 per barrel of Brent crude oil. This will help Exxon Mobil to continue to fund its dividend payments without any issues. On the other hand, the aggressive growth of revenues along with the major share price appreciation are unlikely to happen due to the lack of growth catalysts on the horizon. That’s why if you’re looking for a growth stock – it’s better to look for it elsewhere since the upside in Exxon Mobil appears to be limited right now.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Bohdan Kucheriavyi and/or BlackSquare Capital is/are not a financial/investment advisor, broker, or dealer. He's/It's/They're solely sharing personal experience and opinion; therefore, all strategies, tips, suggestions, and recommendations shared are solely for informational purposes. There are risks associated with investing in securities. Investing in stocks, bonds, options, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Loss of principal is possible. Some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including greater volatility and political, economic, and currency risks and differences in accounting methods. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.
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