Summary
- XOM is attractive in the $60 range to traders, long-term investors, and dividend investors in our opinion, though oil bears are the lone exception.
- XOM has survived through all of the major downturns in energy and always comes out on top.
- Investors need to watch segment-specific performance going forward.
- Our 2019 expectations have us compelled to both trade this name and invest for a 5% yield.
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We have been following the volatility in the energy space over the last year and have been diligently trading the long and short side of many names in the sector. One name that we have traded quite a bit and is looking like it is setting up for another long side entry in the $60 range is Exxon Mobil (XOM). Regardless of where energy prices are, there are BEARS persistently bashing this name. While past performance is no guarantee of future results, Exxon has survived every major downturn in energy and emerged stronger each time. All the while it continues to reward shareholders with a bountiful dividend. Make no mistake, the bears have been correct as a whole the last few years as shares have receded. Trading firms like ours have been able to play the swings, but we believe now is the time for long-term investors to step back in as oil and gas prices have receded. Exxon recently reported earningsand the Street did not find much to like and has been selling on the news, despite the headlines being strong. We like to look at the name from a long-term perspective, and that means that we must have a solid grasp on the fundamentals of the name, especially since this is the one blue-chip we use as a measure for the health of the oil sector.
We believe that XOM is compelling for a long-term entry point under the $70 mark. The stock is just about there right now and has been offering this entry point a few times in recent weeks. At $50 oil, we see a potential opportunity to get long the stock as oil prices are in our opinion low, but we need to keep an eye on the fundamentals. It is not just the top and bottom line which we need to watch either, but also the expenses of the company and the segment specific performance matters. In this column, we will discuss trends in several of the critical metrics you should watch for, in addition to our 2019 expectations.
Top-line strong, though pricing leads to declines
We all know that oil and gas prices are what drives revenue for the company, in addition to volumes. Make no mistake, the higher the commodity price, the more money that can be made by Exxon or its competitors. With that said, revenues have begun to fall along with energy prices. Oil prices began rebounding in 2016 and remained solid until 2019 where they have been pressured again. While volumes matter, there is a direct correlation with revenues for the company and oil pricing. When examining trends in the top line over the last several second quarters, we see the rebound in the top line as oil prices began to rebound from 2016, only to start falling again:
Source: SEC filings, graphics by BAD BEAT Investing
The trend has begun to be positive after falling disastrously from 2015-2016, however weak prices of late remind us of the pain felt nearly 5 years ago. Revenues were down in from last year but were stronger than expected in the quarter. They fell significantly here in Q2 2019 vs. Q2 2018. Revenues fell to $69.1 billion from $73.5 billion, dropping 26% from last year. But it was not all negative. We expected around $68-$68.5 billion based on fluctuations in pricing and happenings with segments in previous quarters, but the Street was more conservative than us. Exxon surpassed our expectations by $726 million but crushed consensus by $1.26 billion.
