Exxon Mobil
beat earnings expectations in the fourth quarter but revenue came up short.
It posted adjusted quarterly earnings per share of $3.40, compared with analysts’ consensus of $3.29. Revenue in the quarter was $95.43 billion, lower than analysts’ expectations of $97.3 billion. Shares were trading down 3.3% in the premarket session at $110.
One issue that may be concerning investors — and causing the stock to fall — is a sharp rise in U.S. drilling expenses. Inflation is making oil and natural gas production much more expensive. “U.S. Upstream capital expenditures grew by more than 60% versus 2021, total production volumes actually declined in the fourth quarter when compared to the prior year on weaker natural gas volumes,” wrote Peter McNally, lead energy analyst at Third Bridge.
The company made a profit of $55.7 billion in 2022, its largest haul ever. But investors are unlikely to focus on its past performance, particularly after the stock already soared 80% last year. To buy the stock now, they have to believe that Exxon will once again become a staple stock in the average investor’s portfolio—and fetch a higher valuation.
The EPS figure for the fourth quarter was above levels from the same quarter of 2021, but below the third quarter. In fact, the third quarter, when Exxon made $4.45 a share, could represent a peak. Analysts don’t expect EPS to rise above $3 in any quarter in 2023 or 2024.
With earnings expected to slip from 2022 levels this year and next, Exxon’s stock performance will depend more on its valuation, and the value that investors put on its dividend, which looks increasingly solid and likely to grow. Exxon’s dividend yield is now 3.2%, better than the average
S&P 500
stock at 2% and the average energy name at 3%. An aggressive stock buyback plan could also whittle its share count and thus boost its earnings per share.
Exxon trades at just 10.6 times its expected 2023 earnings, a discount to the broader market and its own historical valuation. For parts of the past decade, Exxon traded at about twice its current valuation.
To close that gap, Exxon will have to coax investors back to its stock. Some generalist investors are wary today, in part because Exxon’s earnings have tended to follow a boom-and-bust pattern, and in part because of ESG, or environmental, social, and governance, concerns.
The company is trying to convince Wall Street it is in a better position on both those issues.
First, the company says it is no longer at the whim of the boom-bust cycle, because it is staying within a tight budget that will protect it from downturns. Exxon has become much more efficient in recent years, lowering its drilling costs to the point where CEO Darren Woods expects to be able to cover all its production costs by 2027 even if oil prices fall to $30. Executives say they are on track to cut annual operating expenses by $9 billion from 2019 levels by the end of this year.
And Exxon has been investing more heavily in clean energy projects, even though the company still makes the vast majority of its profits from fossil fuels. On Monday, the company said it is progressing on a plan to make low-carbon hydrogen at a plant in Texas. It is also investing in carbon capture and biofuels.
If Exxon can show it is progressing in those goals, some climate-conscious investors who had shunned the shares may wade back in.
Write to Avi Salzman at avi.salzman@barrons.com
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