Exxon Mobil: Vanishing Profits

As predicted and somewhat easily deduced by declining energy prices after the surge from the Russian invasion of Ukraine, Exxon Mobil Corporation (NYSE:XOM) was destined to slash profits targets for the year ahead. After the big price surge in early 2022, the market incorrectly predicted energy prices would remain higher for a long time. My investment thesis remains Bearish on the stock, which is still trading at nearly $103 despite the collapsing profits.

Slumping XOM Profits

Exxon Mobil reported a huge hit to the estimated EPS for Q2. The energy giant is now forecasting a Q2 2023 profit of ~$7.5 billion following a Q1 where income was $11.4 billion with an $11.6 billion non-GAAP profit.

During the just-ended quarter, Exxon Mobil saw natural gas prices crush quarterly income by ~$2.0 billion, with a similar hit to margins in refining products. The combination amounts to a $4.0 billion dip in profits during the sequential quarter, with other categories mostly offsetting each other.

Exxon Mobil has ~4.1 billion shares outstanding, leading to a Q2'23 EPS estimate of $1.83 now versus current analyst estimates up at $2.24 per share. Even more amazing is that analysts had generally forecast a trough quarterly earnings around $0.40 above the actual updated Q2'23 internal EPS target.

WTI oil (CL1:COM) spent a large part of Q2 trading around $80/bbl. Oil prices definitely have some potential downside in Q3, with the quarter starting at only $70/bbl. The company still had some $4 billion in quarterly profits from Upstream operations at risk here considering WTI has a history of trading far below $70/bbl at the lows in the past.

Heading Lower

Despite collapsing profits, Exxon Mobil still trades above $100. The stock didn't trade much above this level pre-Covid, and Exxon Mobil still trades close to the peak even though profits have already collapsed about 60% from the peak in Q3'22, when the energy giant earned $4.45 per share.

Investors don't appear to realize that Exxon Mobil struggled to earn quarterly profits topping $1 per share back in 2019. The company has implemented some cost controls, but the energy giant also instituted a large wage hike for employees back in late 2022.

The general problem with energy companies is that cost cuts usually lead to lower breakeven energy prices. A company like Exxon Mobil can keep pumping oil and natural gas at even lower prices versus conserving valuable assets for higher prices.

Investors need to prepare for the scenario where the company returns to producing a $4 to $5 EPS in a normalized energy price environment. Heck, Exxon Mobil only produced a 2019 EPS of $2.25.

The company promotes a structurally improved cost structure where cash costs are down substantially from 2019. The calculation is complicated, but Exxon Mobil predicts annual structural savings in the $7 billion range, leading to annual EPS boost in the $1.75 range.

As highlighted above, the structural cost savings from 2019 only boost EPS back to the $4+ annual range. Either way, the debate is over whether Exxon Mobil can hold onto structural costs savings and produce normalized profits in the $4 to $5 range with a stock trading above $100, not maintain analyst EPS estimates still holding onto a $9+ EPS scenario that clearly isn't realistic here.

Exxon Mobil is only down ~4% in early trading, suggesting the market still hasn't caught on to the likelihood of lower profits going forward. Analysts need to drastically cut EPS targets for the years ahead, and the constant cuts should push the stock lower and lower.

Takeaway

The key investor takeaway is that the market still hasn't caught onto the downside risk at Exxon Mobil Corporation. The business has structurally lower costs heading into the is downturn, but one has to wonder how discipline the industry has this time around with lower costs allowing for lower breakeven energy prices.

Investors should continue selling Exxon Mobil stock until analysts substantially lower EPS targets for the years ahead and adjust price targets that had the stock jumping back above $120.

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