The Ratings Game: Exxon is getting punished as profit disappoints

The Ratings Game: Exxon is getting punished as profit disappoints

A positive attribute of Exxon Mobil Corp. shares may have turned into a liability Friday on the heels of the energy giant’s quarterly earnings miss.

Exxon’s XOM, -3.18%  stock is often cited as a “safer” investment in energy, since the company’s large chemicals and refining businesses insulate it against volatility on the oil and gas exploration and production side.

On Friday, however, those defensive characteristics also meant the company missed the boat on rising oil prices. The shares fell nearly 4% after earnings results and were poised to end at their lowest in a month. The losses would snap a four-day winning streak for the shares.

Exxon earlier Friday said it earned $3.95 billion, or 92 cents a share, in the second quarter, up from $3.350 billion, or 78 cents a share, in the year-earlier period. Revenue rose to $73.501 billion from $58.077 billion. Analysts polled by FactSet expected EPS of $1.27 and revenue of $74.153 billion.

Oil futures CLU8, -1.44%  have lost 6% in July, but that comes after an 11% bump in June. So far this year, futures prices have gained 15%, coming off 12% gains in 2017 and 45% in 2016.

The miss came complete with cash flow and production shortcomings.

Exxon notched its seventh cash flow miss in the past 10 quarters, and the third in a row, said analysts at Goldman Sachs. Production was another negative: Second-quarter production numbers were 6% lower than first quarter’s and 7% lower than second-quarter 2017’s. Refining and was among the few brighter spots.

Exxon pinned the miss on “significant scheduled maintenance undertaken to support operational integrity” as well as “extended” recovery time from “operational incidents” that plagued its first quarter and weaker gas demand in Europe.

Silver linings included the return to normal liquefied natural gas operations in Papua New Guinea, a massive project that had been hampered by an earthquake; Exxon’s refining operations; and domestic oil production growth.

“Exxon’s ultra-defensive characteristics (including a significant overweight in downstream and chemicals) inherently limit leverage to oil prices,” analysts at Raymond James said in a note Friday.

“Since we expect further oil price gains to cyclical highs over the next six to 12 months, Exxon stands out as one of the least appealing ways to play that among its peers – and the production trend is also subpar,” they said.

Read also: Oil slips but Brent on track for first weekly gain in four

Second-quarter results will keep weighing on the shares, as it continues “a recent trend of rather large earnings misses, and we believe investors may begin to question the through-cycle profitability strength once held by the company,” analysts at Barclays said in a note.

The share weakness came as the energy subsector was third lowest on the S&P 500 index on Friday.

Chevron Corp. CVX, +1.51% the only other publicly traded domestic integrated oil company, also missed estimates on Friday. Chevron reported earnings of $1.78 a share on revenue of $42.24 billion; the FactSet consensus called for EPS of $2.09 on sales of $45.65 billion.

Chevron shares shook off early weakness to gain 1.5% later Friday. Wall Street rewarded Chevron stock despite the earnings miss because that misstep was mainly driven by weakness in international exploration and production, and international refining.

Also helping was Chevron’s announcement of a $3 billion share buyback plan, “demonstrating the company’s constructive outlook for free cash flow generation going forward,” analysts at Goldman Sachs said in a note Friday.

Exxon shares have lost 2.4% so far this year, but have held on to a 9% advance in the past 12 months. That performance compares with 2018 gains of 5.2% and 2.8% for the S&P 500 index SPX, -0.83%  and the Dow Jones Industrial Average DJIA, -0.45% and advances of 14% and 17% for the benchmarks in the last 12 months.

Exxon stock has also underperformed Chevron’s, which has gained 0.5% so far this year and 19% in the last 12 months.

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