On Monday, August 19, I posted a deep dive into the financials at Concho Resources (CXO) to illustrate some of the pressures weighing on the stocks of oil shale producers.
Now Exxon Mobil (XOM) is a very different kind of oil company. It’s diversified globally. It is not only an upstream producer of oil and natural gas, but a downstream refiner and then seller of those refined products. And, not insignificantly in a time of potential cash crunches for oil companies, Exxon Mobil has very deep pockets and very ready access to more capital on the public markets.
But, that all said, Exxon Mobil is facing the same pressures as the small oil shale producers–just on a very different scale and with a significantly different set of resources.
Here are some of the numbers that Exxon Mobil reported for its second quarter on August 2.
Revenue was a staggering (to me at least but maybe I just don’t have very much imagination) $67.49 billion. Operating profit was $3.56 billion. Earnings came to $3.1 billion in the quarter once all the accounting was completed.
Unlike Concho Resources and many oil shale producers Exxon Mobil is showing no signs of pulling back on capital spending. For the quarter the company spent$8.08 billion on capital (refineries, etc.) and exploration expenditures. That was up 22% from the second quarter of 2018.
Production climbed in the quarter, mostly because of a big jump in production from the company’s Permian Basin oil shale assets. Production was up 20% in the Permian from the first quarter of 2019 and up 90% from the second quarter of 2018.
But–and here’s where the Exxon Mobil/Concho Resources comparison gets interesting–in the second quarter Exxon Mobil bought back 5 million shares (to reduce dilution from shares awarded as compensation to employees) at a cost of $414 million. On top of that the company paid out $3.7 billion in shareholder distributions–also known as dividends.
Do the math: The company earned $3.1 billion in the quarter–including a one time gain of 12 cents a share from a change in tax treatment in Alberta–and used $4.1 billion in cash to buy back shares and pay dividends. (The company also saw its tax rate in the quarter drop to 34% from 53% in the first quarter of 2019.)
Where did the extra cash come from in this time of lower oil prices?
From a drop in cash and cash equivalents to $4.2 billion from $4.6 billion.
And from an increase in total debt to $45.2 billion at the end of the second quarter from $40.8 billion at the end of the first quarter of 2019.
I think Exxon Mobil can borrow pretty much until the wells run dry. And I’m not suggesting in any way that the company is in trouble or experiencing cash flow difficulties.
But I would note that at current oil prices there is pressure even at Exxon Mobil on that capital budget, on stock buybacks (which are very modest for this company) and on dividend payouts. My guess is that the company will cut the capital budget if it needs to reduce cash expenditures. Exxon Mobil can always decide to defer construction of a refinery or two to save some cash or to drill a few less wells.
My point is even oil giants like Exxon Mobil are feeling the pressure from lower oil prices. And that’s not a plus for the companies that lease them drilling rigs or sell them steel pipe or provide seismic services. Which is why I sold shares of Schlumberger (SLB) and Tenaris (TS) out of my 50 Stocks portfolio this week.