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This is clearly a bad time to be in the oil business. The roughly 50% collapse in commodity prices, like oil and natural gas, over the past year has crushed profitability across the energy sector. Even the biggest of Big Oil, Exxon Mobil (NYSE: XOM), has nowhere to hide. This is the peril of having a business model rely so much on a commodity.
Exxon Mobil registered a steep decline in revenue and profits last quarter, as compared to the same period one year ago. But all things considered, Exxon Mobil’s results could have been far worse. The company saw relatively strong performance in its oil and gas exploration and production businesses, and its downstream business was a nice offset to plunging oil prices.
Exxon Mobil’s second-quarter results were far better than that of its closest competitor in the U.S., Chevron (NYSE: CVX), meaning Exxon Mobil once again demonstrated why it is the least risky of the integrated Big Oil majors.
Pain at the Pump
In all, Exxon Mobil profits fell 52% last quarter, year-over-year, to $4.1 billion. Earnings per share fell 51% to $1.00, and clearly the collapse in oil and gas prices were the primary culprit for this. Exxon Mobil’s upstream exploration and production business, which is highly dependent on supportive underlying commodity prices, saw profits decline by 75%.
This looks bad, but consider that Chevron earned just $571 million last quarter, down from $5.6 billion in the same quarter last year.
At the same time, Exxon Mobil is taking steps to mitigate the harsh climate for oil and gas majors. The first step is cutting costs. Capital expenditures were cut 16% last quarter, versus the same period in 2014. Furthermore, Exxon Mobil increased oil-equivalent production by 3.6% year-over-year.
And Exxon Mobil’s downstream business more than doubled profits year-over-year. This helps offset the poor upstream business. Downstream activities, including refining, tend to improve when oil prices decline, because falling oil prices create lower refining feedstock costs. This helps boost refining margins.
Going forward, Exxon Mobil will rely on new upstream projects to keep fueling higher production. Last quarter, the company made a significant oil discovery in Guyana on the 6.6-million-acre Stabroek Block. And Exxon Mobil’s huge Kearl oil sands project in Alberta, Canada, has started production ahead of schedule and doubled gross capacity last quarter.
Exxon Mobil Is Still a Worthy Long-Term Investment
As a result, it’s no surprise why Exxon Mobil stock fell 4% after reporting its quarterly earnings. In 2015, shares of the energy behemoth are down 14% year-to-date, although this represents relative outperformance compared to Exxon Mobil’s closest peers. Consider that shares of Chevron are down 21% so far this year.
The poor stock performance may make it seem like investors should sell Exxon Mobil and never look back. But longer term, investors should stick with Exxon Mobil. It is a best-in-breed company. Exxon Mobil is cutting costs, and still has the financial flexibility to pay its dividend, which currently offers a hefty 3.8% yield.
And, Exxon Mobil actually increased its dividend by 6% earlier this year, which is no easy task amid such a brutal operating climate. Virtually every one of Exxon Mobil’s competitors in the integrated space has not been able to increase dividends.
Exxon Mobil stock trades for just 11 times trailing earnings, meaning if commodity prices do ever recover from the brutal downturn, the stock will likely reward patient investors.
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