Exxon Mobil Stock: Impressive (NYSE:XOM)

At a time when large parts of the globe are battling with an energy crisis, it is the integrated majors which benefit in a big way, including the like of Exxon Mobil (NYSE:XOM) which posted very strong results for the third quarter.

While other energy producers saw peak earnings (at least so far) in the second quarter of this year, Exxon posted even stronger results for the third quarter, warranting an update after a very strong quarter.

About The Results

It is hard to comprehend, but the sheer size of the results reported by Exxon are staggering as Exxon posted third quarter sales of $112 billion, well ahead of a billion per calendar day on which the business earned operating profits of $25 billion. Down the line, net earnings just shy of the $20 billion mark appeared, for earnings of $4.68 per share. While net earnings inched up in a small way from the second quarter, this is mostly driven by a lower effective tax rate in the third quarter, as results are largely alike.

The profit driver behind the near $20 billion GAAP profit was the upstream business, which generated $12.4 billion in net earnings on the back of production of 3.7 million barrels of oil-equivalent per day, up slightly on the year before. Note that three quarters of the earnings are generated abroad, with the US being responsible for just a quarter of profits.

The refining segment, reporting the results under ‘energy products’ saw a strong quarter as well, with throughput of 4.2 million barrels of oil-equivalent per day comfortably surpassing production and coming in at the highs level since 2008. Moreover, margins were very strong, as earnings came in at $5.8 billion.

The chemical product business saw the headwinds from slower growth and higher input prices, but the simple reality is that this business is much smaller. After both exploration and refining posted very strong year-on-year earnings growth numbers, earnings were more than cut in half to $812 million. Specialty product earnings of $762 million were quite stable, as these activities dwarf, compared to notably the exploration segment.

Earnings of $4.68 per share trend at nearly $20 per share which together with a $110 share price works down to a 5.5 times multiple based on current run rate or profits, among the lower multiples of the majors.

About The Cash

Naturally, the strong cash flows are used in part to strengthen the balance sheet, as Exxon ended the quarter with a net debt load of $15 billion. To compare, net debt stood at nearly $37 billion by the end of 2021, albeit that Exxon has many other long liabilities related to pensions, etc. being prevalent on the balance sheet.

Of the $60 billion in cash flow generated in the first three quarters of the year, Exxon is currently investing at a rate of around $17 billion a year here in terms of capital spending, lagging the depreciation charges of $25 billion by a huge degree, to thereby generate cash flows on top of the already steep earnings.

The dividend costs about $15 billion per annum here, and so far Exxon has bought back $10.5 billion worth of stock this year. Needless to say, by far the largest amount of cash flow generation is earmarked to improve the balance sheet, which looks quite healthy, and to buy back some shares as well.

The company remains conservative with its dividend policy, as a $0.91 per share quarterly dividend has been hiked just three cents above that last year. Of course, dividend policies and aggressive hikes have implications for many years to come, and hence some prudence in the hike is welcomed. The overall results allow Exxon to make some moves as well on the ESG front, as it has signed a large CO2 capturing agreement.

The company has bought back 91 million shares, at least based on the diluted share count, so far this year. Right now, Exxon has reduced the share count to 4.18 billion shares, for a $460 billion equity valuation at $110 per share here, as a modest net debt load makes for a $475 billion enterprise valuation. Shares have done well in this environment as they rose from $70 at the start of the year to $110 now, adding more than $160 billion to the valuation, albeit that a big part of this increase has been reported in net earnings along the way.

Some Perspective

With a 3.2% dividend yield historically being on the low side, certainly in relation to current interest rates, Exxon is really a growth story/safety play for many investors here and a hedge against geopolitical turmoil and energy crises continuing. In the year 2008, shares traded near the $100 mark amidst the economic peak ahead of the crisis, in 2014, they hit this mark again when the US shale revaluation was peaking. Today, shares break the $100 mark in a response to the current political events as shares have risen in a dramatic fashion from lows around the $30 mark in 2020 when we briefly saw negative energy prices.

Contrary to 2008 and 2014, large capital deployment has not been seen yet in terms of an ill-timed capital spending boom by the industry at large, or a large deal being announced by the company at the top of the market. Right now, it seems just a solid execution game, reacting as the news comes with capital spending even lagging depreciation charges, although at some point that will need to pick up a bit as well.

While the first calls for windfall taxes set the tone for an interesting debate, it is good to create some perspective as well. Of course, current profitability is incredible, now trending at $19 per share, yet this clearly is an outlier. In comparison, the company only earned $5 per share in 2021, lost a similar amount in 2020 as earnings have only totaled $8 and change over the past four years, resulting in abysmal earnings on average between 2018 and 2021.

What is different this time is reserved capital spending, as big profits are not used to boost production to thereby lower prices, but this is not a surprise either given the painful timing mistakes made in the past by the sector, as well as the need to move away from fuels and deliver on ESG promises.

With a great current earnings yield, which reasonably can not be expected to continue, Exxon delivers on its promises, that of a diversification and conservative long term value creator, operating in a crucial yet tough cyclical industry.