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🛢️ Exxon: More Money Than God?
No other global oil major has reported a quarterly profit as high as Exxon Mobil (XOM) did in Q2. However, the White House is displeased with oil companies swimming in a pool of cash. There are also fears that Q2 may have been the peak for Exxon. Does this leave no margin for error?
Profits All The Way
Exxon reported a record loss of $22.4B in 2020, its first as a public company and its worst performance in four decades. The rebound in oil demand brought about a swift recovery as 2021 ended with $23B in profits for the largest oil company in the US.
The company earned ~80% of its 2021 profit in Q2. Increased production, tighter cost control, and higher realizations contributed to the $17.9B bottomline. This is higher than its best quarter of 2008 when Brent Crude peaked at $147, and its best-ever quarter in 2012, when it reported a net profit of $15.9B.
Recent forecasts show that oil demand is not tapering anytime soon. The EIA expects the demand-supply balance to be normal for the second half of 2022 and 2023. The International Energy Agency mentioned in June that global oil supply may even struggle to meet demand in 2023 due to a resurgent Chinese economy.
Investors cheered the record-breaking profits, even as the company missed revenue estimates while surpassing expectations on the EPS front.
Key Highlights From Q2 2022:
- Revenue: $115.6B Vs $132.7B expected
- Earnings Per Share: $4.14 Vs $3.74 expected
- Net Profit: $17.9B Vs $5.5B In Q1 2022
Exxon’s natural gas realizations and refining margins are well above the 10-year range due to a tight demand-supply balance for oil, natural gas, and refined products. It continues to invest in its advantaged portfolio, including Guyana, global LNG, the Permian, and high-value products.
The record profit comes just a year after activist investor Engine No.1 managed to win two seats on the company’s board after arguing that the oil giant should commit to bringing its emissions down to zero by 2050.
Exxon has made ~$50B in net profit over the last six quarters. It utilizes cash to reduce debt and reward shareholders as well. It has brought down its net debt to ~46.9B at the end of Q2 from ~$70B at the height of the pandemic. The company’s debt-to-capital ratio is also down to 13% from 17% in Q1.
The management does not see any signs of recession for its business. In fact, the company’s CFO mentioned at the earnings call that the demand for Jet Fuel has increased as global travel recovers.
White House Vs Big Oil
Big Oil’s record profits have drawn the ire of the White House, which faces increasing public pressure over higher fuel prices ahead of November’s mid-term polls. US President Joe Biden said that Exxon has made “more money than God” this year. Record corporate profits, usually a sign of a healthy economy, have turned into a political hot potato in this case.
The White House claims that refiners are not doing enough to relieve the fuel crunch and that companies benefit at an average consumer’s expense. The US energy cost jumped 41.6% in June, the largest 12-month increase since April 1980.
In response, Exxon’s management said that production would not increase overnight. It is expanding capacity by 250K barrels per day at its Texas refinery by Q1 2023. It has boosted output in the Permian basin of West Texas and New Mexico by 130K barrels per day, compared to H1 2021.
The management also says that there is no incentive to increase production. The UK has already imposed a windfall tax on oil & gas profits earlier this year. French lawmakers have made a similar proposal for energy & transportation companies. US lawmakers have also discussed a windfall tax, which faces a long road in Congress. Besides, the company is also facing labor shortage issues, which hampers production increase.
In 2021, there were clarion calls against Big Oil to switch to cleaner energy sources and reduce emissions. The clarion calls have changed to increase production to meet demand within a year. Exxon plans on increasing production by 25% this year.
Analysts believe that Q2 may have been the peak for Exxon’s earnings and refining margins. Gasoline and diesel refining margins in the US have dropped 47% and 25%, respectively, from their Q2 peak. Even Pension Funds and Mutual Funds remain reluctant to back these companies on climate change concerns. Both Exxon & Chevron are up ~50% this year, easily outperforming the S&P 500.
Oil companies are constantly on a slippery slope. Exxon may have had record profits this time, but the question is, are these record earnings sustainable? If yes, then for how long? Well, investors are certainly not complaining as long as Big Oil keeps their portfolios on the boil for good!
XOM ended at $94.48, down 2.53%.
Company Snapshot 📈
XOM 94.48 -2.45 (2.53%)
Analyst Ratings (28 Analysts) BUY 46% HOLD 50% SELL 04%
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Today’s Fun Fact
Texas produces nearly 36% of the oil output in the US and holds nearly one-third of the total oil reserves of the country