Our fair value estimate and narrow moat rating for the firm are intact.
Allen Good, CFA
01:45 PM | Email Article
reported a near-doubling in second-quarter earnings, but the relative improvement lagged peers and fell below consensus estimates, sending shares lower. The shortfall largely resulted from maintenance activity in the upstream and chemical segments that negatively affected earnings. Nothing in the quarter altered our long-term outlook on the firm, leaving our fair value estimate and narrow moat rating intact. Second-quarter earnings surged to $3.4 billion from $1.7 billion the year before, led by increases in upstream and downstream earnings. Upstream earnings jumped to $1.2 billion from $294 million last year thanks to higher commodity prices, which offset a nearly 1% decline in production volumes. Quarter to quarter, Exxon’s production will likely fall and increase on maintenance activity and new project startups; however, the outlook through 2020 remains for little or no growth based on management’s latest guidance, although margins should improve with the addition of higher-margin production to the portfolio.
Allen Good, CFA, is an energy strategist for Morningstar.
Downstream earnings increased to $1.4 billion from $825 million last year on higher volumes and wider industry margins. Chemical earnings slipped to $985 million from $1.2 billion last year, largely on higher maintenance activity.
Exxon generated sufficient free cash flow during the quarter to cover capital spending and the dividend. Through the first half of the year, Exxon generated $15.2 billion in operating cash flow, sufficient to fund its $7.5 billion capital expenditure and $6.4 billion in shareholder distributions. Although capital spending is running below full-year guidance, it will likely be back-end-loaded, as is typically the case, while two large acquisitions have yet to be completed. We still expect Exxon to easily fund its dividend, however, and place its break-even level around $40/barrel, the lowest of the group.
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