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2019-10-11 02:27:43

I strongly believe that Exxon Mobil’s (XOM) stock price may come under more pressure, once its 3Q19 earnings results are announced on October 31, 2019. Exxon Mobil’s stock price had come under pressure on Wednesday, October 3, after the company released its latest Securities and Exchange Commission (SEC) filing report a day earlier. Before I analyse this report, I would like to highlight a few takeaways from my previous article on Exxon Mobil. On August 7, 2019, I had stated that Exxon Mobil’s stock will face downward pressure in the near future , as its actual performance was not in sync with its aggressive growth strategy.

Although Exxon Mobil plans to achieve a double-digit growth in all its three segments, only upstream segment reported decent numbers in 2Q19, while the downstream and chemical segment earnings declined sharply. Investors must note that Exxon’s stock has declined by more than 4.5% since the publication of my earlier article. This indicates that the market is expecting a strong comeback from Exxon Mobil when it reports its 3Q19 earnings results. But, when I look at the latest SEC report, things don’t look that great for the energy major.

Exxon’s 3Q19 earnings results may disappoint the markets

As per the latest SEC filing report, Exxon’s cumulative profits for 3Q19 would be 50% lower YoY at around $3.1 billion. This is not a good development at all. The SEC report further states that Exxon’s upstream profits will witness a 45% YoY decline from the previous year’s $4.23 billion. Investors must note that Exxon’s upstream earnings had increased from $3 billion in 2Q18 to $3.26 billion in 2Q19, and this was when its upstream volumes stood at 3.9 million barrels per day with a YoY growth of 8%.

The latest SEC report reveals that Exxon’s 3Q19 upstream volumes (supported by Permian basin and Natural gas volumes) may remain largely unchanged when compared to the second quarter, but the results will be impacted by lower crude oil prices and its volatility. In my earlier articles on Exxon, I have repeatedly stressed that Exxon’s performance is closely related to oil prices when compared to other energy majors like BP (NYSE:BP) and Shell (NYSE:RDS.A) (NYSE:RDS.B) which have a more diversified energy portfolio. So, I will not be surprised if Exxon Mobil reports another weak quarter because of low oil prices.

Image Source: Exxon Mobil 2Q19 earnings update

Looking at Exxon’s downstream segment, it can be seen that its performance is consistently going down. Its downstream earnings had declined by 70% YoY in 2Q19 mostly because of lower refining margins and high maintenance activity. However, the latest downstream projections surprise me, as Exxon (in its 2Q19 outlook) had clearly indicated that the financial impact of scheduled maintenance activities would be lower in 3Q19. The latest report states that downstream profits may go down by 50% YoY at $500 million. Going by this trend, investors can expect a similar surprise in the Chemical segment (refer to the above figure) which also witnessed a steep YoY earnings decline in 2Q19.

Takeaway for Investors

Since last few years, Exxon Mobil’s financial performance has been largely supported by its upstream earnings, and these earnings, in turn, have been supported by rising upstream volumes. This trend clearly indicates one thing - that Exxon Mobil’s stock performance is highly dependent on oil prices and its volatility. When I look at oil prices, I firmly believe that prices will be in the range of $52- 57 in near future because of the global crude oil inventory build-up.

Image Source: EIA

In fact, U.S.-based Energy Information Administration (EIA), in its latest short term energy outlook, has cut its oil price forecast because of the rising global crude oil inventories. This factor alone will put a lot of pressure on Exxon Mobil’s future financial performance. And then, we have the latest SEC report which is predicting another weak quarter for the company. Yes, I agree that Exxon Mobil is an old energy stalwart and a good dividend paymaster. But the current market situation is not helping its stock price. With this, I firmly believe that Exxon's stock will continue to remain below $70 till the end of 2019. Investors must take note of this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. @Gaurav81184
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