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Investors were bracing for the worst when Big Oil entered earnings season. Of course, there was ample reason for this fear, since oil prices are down approximately 50% from the peak level last year. This amounted to the worst crisis hitting the oil industry since the financial crisis.
And yet, when the biggest of Big Oil reported, investors breathed a sigh of relief. Exxon Mobil (NYSE: XOM) handily beat analyst expectations, even though the results themselves were about as bad as could be expected.
The Exxon Mobil earnings report proved yet again that it’s the strongest company in the oil industry. As a $366 billion company by market capitalization, Exxon Mobil is the biggest energy company in the world. This provides the company with a great deal of scale, and the flexibility to effectively cut costs and raise cash to help withstand downturns.
Here’s how Exxon Mobil blew away estimates last quarter, and what it means for investors.
Exxon Mobil earned $4.9 billion in profit last quarter. While that was down by nearly half year-over-year, it easily topped expectations. Analysts forecasted just $0.83 per share, according to average estimates compiled by Thomson Reuters.
One of the reasons why Exxon Mobil easily beat expectations is that it has aggressively cut costs. The company stated it has reduced costs by 20% in its U.S. shale and oil gas fields.
Another key reason is that refining provided a major boost. Refining profits doubled from the year-ago quarter, to $1.7 billion. This is a familiar theme that has played out each quarter during the oil crash. When oil prices plummet, refining operations tend to improve, because falling oil reduces feedstock costs for refiners.
Other oil and gas majors like Royal Dutch Shell (NYSE: RDS-A) are seeing the same benefits. Shell reported $3.2 billion in quarterly profits, which also beat analyst expectations. Again, refining did the heavy lifting.
Separately, Exxon Mobil also increased its dividend by 6%. In my previous article about Exxon Mobil, I predicted the company would raise its dividend on schedule. This view might have seemed ludicrous considering the steep collapse in oil prices over the past year, but Exxon Mobil has a strong business that is built to survive even the toughest operating climate.
Exxon Mobil has now increased its dividend for 33 years in a row, and the company is part of the exclusive S&P 500 Dividend Aristocrat list.
Exxon Mobil’s quarterly earnings report once again reminded investors that it’s the safest integrated oil and gas super major. It easily beat analyst expectations, which is no small feat in light of the total carnage that swept through the energy sector over the past year.
Most other energy companies are not meeting estimates, and are seeing their stock prices fall dramatically. By contrast, Exxon Mobil shares are only down 13% in the past year – far better performance than most other energy stocks in that time.
For investors who feel the oil crash has presented some attractive opportunities, there are a couple of ways to proceed. One would be to buy an independent upstream company like ConocoPhillips (NYSE: COP), which does not have a refining business. These companies are much more reliant on oil prices, and if oil rallies from here, they will be the biggest beneficiaries.
On the other hand, for investors seeking relative safety, there are few better options than Exxon Mobil. The stock trades for just 11 times earnings, offers a nearly 3.5% dividend yield and has one of the best balance sheets in the industry.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder.
Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom.