Exxon Mobil's (XOM - Get Report) second-quarter earnings tumbled 60% the firm said Friday on weakness in some core markets and lower-than expected cash flow, sending its shares sharply lower from levels analyts said were baking in a better performance.
The Irving, Texas oil giant earned $1.7 billion, or 41 cents per share, in the period, 60% lower than the same quarter last year and 36% lower than consensus. Its sales dropped 22% to $57.7 billion, 5% below analysts' forecast.
Its exploration and production segment fell 16 cents per share on especially weak international results and its downstream segment decreased 4 cents per share, also on international weakness that was only partially offset by better U.S. performance, Guy Baber, an analyst with Piper Jafray's Simmons & Co. International, said in a report. Chemicals - which was up 2 cents per share - was the lone segment that outperformed his model.
"This was a tough quarter for XOM, particularly in light of the fact that the stock trades at an elevated premium (60% premium on cash flow), effectively discounting pristine execution and delivery," he said.
Baber has the stock at neutral with a price target of $75. It closed at $90.20 yesterday and was trading down 2% in midday trading at $88.27.
Baber noted that the company's operating cash flow before asset sales totaled $4.5 billion, well below his $6.5 billion expectation and analysts' consensus of $6.8 billion, mostly due to working capital and other items that reduced it by $2 billion. Asset sales proceeds totaled $1 billion in the quarter while its cash sat at $4.4 billion and its debt at $44.5 billion.
Investor relations chief Jeff Woodbury said on a conference call with analysts that the company is making good progress on reducing costs (they're down to $8 per barrel on a development basis) and is focused on expanding margins, blaming "price impacts" on cash flow. He reiterated the company's guidance of cash flow neutrality at $40 to $80 per barrel, saying the company is well positioned to hit cash flow neutrality next year.
"We remain focused on capital efficiency -- we're still capturing market savings -- and we continue to execute our projects very well," he said. "There's still opportunity to delay some of our resource investments that in this downmarket we can restructure to capture additional value."
Production also came in slightly lower than anticipated, mainly because of the wildfires in Canada and weak oil production in Africa, Baber said. But Exxon Mobil's capital expenditures came in below expectations, implying that the company is spending below budget -- $10.3 billion so far this year versus $23.2 billion for the full year -- he said.
When asked by analysts whether Exxon Mobil would commit to a capital management plan as others in the industry are doing, Woodbury said nothing had changed in the company's strategy. "We keep focused on maximizing shareholder value and will continue to measure that on return on capital employed," he said.
The executive said the company would continue to make share buyback decisions on a quarter-by-quarter basis and it would consider paying down its debt even though its balance sheet is strong. "We'll maintain prudent cash management and we'll invest wisely; we don't want to forgo attractive opportunities," he said.
Woodbury wouldn't comment on recent speculation around its potential purchase of natural gas resources off the coast of Mozambique from Eni and Anadarko Petroleum (APC - Get Report) , which could help the development of its liquefied natural gas plant there. It recently agreed to pay $3.6 billion for InterOil Corp., which has gas discoveries off the coast of Papua New Guinea.
"I'd say from an acquisition standpoint that it's businesses as normal," he said. "We stay alert to the value propositions and we're not focusing on a specific geography or resource type. It has to compete with resources we've got in our existing inventory. We have to have confidence that we can bring value to it that will be accretive to our returns. We have the flexibility to do a number of things and acquisitions is one of those things."
When asked about acquisition opportunities in the U.S., he acknowledged that there's been a slight pickup in M&A but a deal for Exxon Mobil would have to create long-term value. "The longer that prices stay in this area code, the more likely it is to come to a win-win agreement," he said.
The executive was asked repeatedly about when the company might see production from its big new discovery off the coast of Guyana, eventually admitting that it probably wouldn't be until early into the next decade.
Exxon Mobil claimed in its presentation to be the largest operator and driller in the Permian and Bakken basins and the largest natural gas producer in the U.S. Woodbury said the company also has 10 major start-ups this year, two of which have already initiated production.