More Pain Likely for Exxon Mobil

Updated from 7:44 a.m. EDT on Oct. 31.

Exxon Mobil (XOM - commentary - Cramer's Take) reported third-quarter 2007 fully diluted EPS (ending September) of $1.70 (-4% vs. difficult comps same quarter last year -- a 3% negative surprise) on revenue of $102 billion (+3% vs. difficult same quarter last year -- a 4% positive surprise).

Capital spending rose 8%. EPS contraction reflected lower refining and chemical margins, partially offset by higher realized crude oil prices. This report marks the second consecutive negative surprise following a streak of positive results -- not a favorable trend.

The EPS loss would have been worse but for material share repurchases sourced from ample free cash flow (i.e., an additional 2% of outstanding shares purchased during the quarter, or 5% fewer outstanding shares year over year). Underlying upstream earnings dropped 3%, primarily reflecting a 2% production decline -- including a 5% natural gas liquids decline and a Venezuelan asset discontinuation -- partially offset by higher oil prices.

Downstream earnings were crushed, though, down 31% on slumping margins as gasoline prices have lagged oil price expansion. Chemical earnings also fell 11% on lower margins despite flat volume.

Exxon Mobil gapped 3% lower at the market open, taking out initial $90 support. Such performance helps return the shares toward the top band of their five-year, upward price channel and within a steeper one-year channel.

More pain is likely, however, given fresh earnings concern and a continuing 35% premium valuation to industry. The good news is that any such declines are likely limited as next support is $85 and $80 (-5% and -10%, respectively). As well, on-balance volume remains relatively optimistic. Further price declines will likely create a buy-on-the-dip opportunity as investors then more confidently focus on better future earnings and hope for a third sustainable attempt to break out above all-time highs, but wait for it.

Exxon Mobil Preview: Mind the Dip

Exxon Mobil (XOM - commentary - Cramer's Take) is scheduled to report third-quarter 2007 earnings (ending September) in a conference call at 11:00 a.m. EDT on Thursday, Nov. 1. The current consensus estimate for fully diluted quarterly EPS is $1.75 (-1% vs. high comps same quarter last year, excluding extraordinary items) on revenue of $98 billion (-1% vs. high comps same quarter last year). Exxon Mobil has a strong record of beating expectations, but the last surprise was negative, and current quarterly estimates have downgraded 2% over the last three months despite new oil price records. While a positive surprise is always possible in energy this decade, a negative surprise on difficult comps is again more likely this time around.

For second quarter 2007, Exxon Mobil reported a small -7% negative surprise on significantly upgraded estimates of 6% fully diluted EPS growth on -1% revenue contraction. The gain was entirely due to sharply increased share repurchase activity (e.g., shares outstanding declined -7% year over year). Underlying weakness in natural gas liquids (NGL) realizations (i.e., mature fields) and oil/gas volume was mostly offset by higher refining. Total hydrocarbon production was 4.1 million barrels of oil equivalent per day. This week, investors will be looking for updates on expanding domestic NGL production, non-U.S. upstream project status (namely, the seven new projects that were expected to start in 2007) and additional share repurchase activity.

Having clawed back near all-time highs following the summer market rout, Exxon Mobil shares now trade 8% above the top band of a five-year, upward price channel and at the top of a more recent, steeper one-year upward channel. Technicals also do not provide comfort, as moving average convergence/divergence and relative strength have both declined strongly during the latest rebound, while on-balance volume merely held level. Moreover, shares still sell for a 35% premium valuation vs. the industry, despite underperforming that industry (in part due to below average earnings growth). Exxon Mobil is likely to soon decline toward support within price channels (i.e., $90, $88, $85 and $80 or -2%, -4%, -7% and -13%, respectively). Such action would no doubt create a buy-on-the-dip opportunity, however, as investors turn toward buoyant fourth-quarter 2007 earnings.

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At the time of publication, White had no positions in the stocks mentioned.