ExxonMobil's Earnings Slip on a Rare Writedown

ExxonMobil's (XOM -2.78%) peers have written down and impaired the value of several of their assets since the beginning of this oil and gas downturn, but ExxonMobil had not yet done so. That changed this past quarter when the company took a $2 billion hit to the bottom line. Despite that large asset charge, ExxonMobil's results weren't all that bad. Let's take a look at the numbers to see why the fourth quarter should give some hope for the coming year.  

Image source: Getty Images.

By the numbers

Data source: ExxonMobil earnings release. * In millions, except per-share data.

Last quarter, management gave everyone a heads-up that we should expect a sizable asset writedown this quarter. Well, we got it. Management took a $2.02 billion asset impairment, mostly related to its dry gas operations in the Rocky Mountains. This is a little bit of a surprise, actually. Based on the statement last quarter about taking oil and gas reserves off the books, there was the assumption that assets like its Canadian oil sands would be impaired. 

This writedown is pretty revealing, though. Management does writedowns based on discounted cash flows for those assets and the current carrying values of those assets. So reading the tea leaves into this impairment charge, we can come to two conclusions: The long life aspect of Canadian oil sands means that their asset value may not face as much risk as many might assume, and that there has been a permanent structural shift in natural gas production and pricing in the U.S. 

Aside from that one big change, the rest of ExxonMobil's results were par for the course. Downstream and chemical results suffered slightly from rising crude oil prices that impacted feedstock costs for these segments, and some favorable tax-related items gave its corporate segment a rare gain. 

DATA SOURCE:  EXXONMOBIL EARNINGS RELEASES. CHART BY AUTHOR.

The one bright spot in the quarter was ExxonMobil's cash from operations. The $7.4 billion in cash was more than enough to cover its $4.8 billion in capital expenditures for the quarter, but fell just short of also covering the $3.1 billion in dividend payments. The $2.1 billion in asset sales helped to make up for the rest without having to take on any additional debt, something few integrated oil and gas companies have been able to do lately. Management quickly put that excess cash generation to work as it reduced total debt by $3.4 billion to $42.8 billion.

What happened with ExxonMobil this quarter?

• With the retirement of Rex Tillerson to become President Trump's secretary of state, the board of directors has elected Darren Woods to become CEO of the company. Tillerson was expected to retire in the next couple of years as he was approaching mandatory retirement age, so the company already had a succession plan in place.
• Total production in 2016 slightly decreased from 4.2 million barrels of oil equivalent in Q4 2015 to 4.1 mmboe/d. 
• The company announced that it will expand operations at one of its major petrochemical plants in the U.S. Gulf Coast. The polyethylene plant in Beaumont, Texas, will expand its capacity by 65% to 650,000 tons per year. The company says the abundance of cheap natural gas was one of the big decision factors in this plant. It should come on line in 2019.
• After announcing that the size of its Liza discovery off the coast of Guyana was in excess of 1 billion barrels this past quarter, it also said that a new discovery within that offshore block was found 10 miles away. The well is expected to hold 100 million to 150 million barrels of recoverable oil.
• A major natural gas discovery in Papua New Guinea was also revealed. The company has made some sizable investments in the island nation between its Papua New Guinea LNG export terminal and the recent acquisition of InterOil. 
• ExxonMobil made a $5.6 billion purchase of land in the Permian Basin. The 250,000 acres are believed to contain up to 3.4 billion barrels of recoverable oil equivalent. This makes ExxonMobil one of the largest acreage holders in the Permian, which is becoming the premier shale reservoir in the U.S.

What management had to say

Senior Vice President Jeff Woodbury gave his typical "just the facts" conference call, where he pointed out on multiple occasions that the company was generating more cash from operations than its capital budget. He said:

ExxonMobil earned $7.8 billion in the year, while managing through a challenging business environment. Corporation delivered on its plan to produce 4.1 million oil-equivalent barrels per day and maintain focus on business fundamentals. Volume contributions from our portfolio of new developments underscore our project execution excellence and reputation as a reliable operator. Total CapEx was $19.3 billion, down 38% from 2015, as we exercised capital discipline and investment selectivity and continued to push -- pursue market and execution efficiencies. Solid operating performance, combined with continued investment and cost discipline, generated cash flow from operations and asset sales of $26.4 billion, and positive free cash flow of $9.7 billion. As I mentioned in the fourth quarter, cash flow from operations and asset sales more than covered the dividend and net investments in the business.

10-second takeaway

ExxonMobil's results, even adding in the large asset impairment, weren't that bad. The big asset charge hides the fact that the company's cash generation has improved significantly compared to the prior quarter and portends a much better 2017. If you want to get into the nitty-gritty of ExxonMobil, its analyst day presentation is on March 1, where it will go into detail about its production and spending outlook for the next several years.