Energy

Did Exxon Mobil Intend to Lower Earnings Expectations at the Start of 2020?

Jon C. Ogg

Published: January 3, 2020 2:57 pm

Last Updated: January 30, 2020 11:36 am

On a day full of Middle East tensions causing a big price gain in oil, and with the many of the speculative energy stocks surging, you might assume all the leading U.S. oil and gas stocks might be surging as well. That was not in the cards for Exxon Mobil Corp. (NYSE: XOM). Despite a nearly 5% dividend yield, and despite some hopes and calls for 2020 to be the year this stock gets its act together, Exxon traded lower by about 0.5%, after having been up about 1.5% in the premarket trading session. The drop might not exactly seem to be a catastrophe, but Exxon’s stock greatly lagged the market with a mere 2.3% total return.

Exxon submitted data to the Securities and Exchange Commission to offer perspective of its market and planned factors affecting earnings from the fourth quarter of 2019, relative to its third-quarter (2019) earnings. The filing did note that the factors are generally related to market dynamics, seasonal patterns and planned activities, and the company specified that the list of factors is not meant to be a comprehensive list of all its changes, nor is it meant to provide an estimate of its fourth-quarter earnings. That did not stop firms from opining about the views seen in the report as it indicated weakness in refining margins and from chemicals production.

Credit Suisse has a mere Neutral rating and $70 target on Exxon, but the firm issued a report suggesting that the data indicates another quarter that looks much weaker than expected. The firm indicated that the results implied that Exxon’s earnings would be closer to approximately $0.35  per share, rather than the consensus estimate of $0.75. As such, Credit Suisse has lowered its expectations to earnings of $0.37 per share from its prior forecast of $0.76. The Credit Suisse report said:

This marks the fourth consecutive quarter Exxon Mobil has preannounced much weaker than expected financial results. These factors are expected to impact fourth-quarter Upstream, Downstream, and Chemicals earnings by +$0.1 billion, -$1.0 billion, and -$0.45 billion (at mid-point) relative to third quarter results, implying companywide fourth quarter earnings down ~50% quarter-over-quarter versus consensus up 5%.

Goldman Sachs also jumped in on some caution by maintaining its Neutral rating and lowering its target to $72 from $74.

Merrill Lynch has a Buy rating and $100 price objective on Exxon, but the firm’s technical trading team has a more cautious view. Its Thematic Stock Charts report showed that Exxon shares are currently at risk for a bearish consolidation while below the $73 to $75 range. The firm even noted that a break below support levels of $67, down to $66.50, would suggest more downside risk, down to $58 and perhaps down to $55. That would be bad considering that Exxon’s share price has not been down close to $60 since mid-2010. If that occurs, it likely will be rather difficult for analyst Doug Leggate to maintain his $100 fundamental price objective.

Another brief report from Cowen comes with a Market Perform rating. That report indicated that Exxon’s assets sale in Norway would add about $2.3 billion worth of cash, and after adding in its $1.8 billion of free cash flow, it has enough to cover the $3.8 billion dividend payout without taking on more debt or lowering its cash reserves. Still, the firm is concerned that Exxon doesn’t seem able to cover that dividend payout consistently based on cash flow alone for several years.

It’s hard to know ahead of time whether a drastic change in earnings is realistic, but the market sure treated it that way. Exxon’s Reg. FD release said:

This information is only intended to provide additional information regarding current estimates of certain factors management believes will likely affect earnings for 4Q 2019 relative to 3Q 2019 to assist investors, analysts and others in formulating their own estimates. It is not intended to be a comprehensive presentation of all factors that will affect the Corporation’s sequential earnings or to provide an estimate of the Corporation’s 4Q 2019 earnings. Actual earnings and the impact of factors identified here may vary depending on the impact of other factors not identified here and are subject to finalization of the Corporation’s financial reporting process for the fourth quarter.

With less than 90 minutes remaining in the trading day, Exxon shares were down just over 0.5% at $70.32. The consensus analyst target price was $78.47 at year-end. Its 52-week trading range is $66.31 to $83.49, and Exxon’s woes are at a time when the broad stock market indexes are just about 1% under all-time highs.