ExxonMobil (XOM +1.56%) recently gave investors a glimpse into its upcoming first-quarter earnings report. The oil giant expects to report a roughly $900 million increase in its quarterly profit. A combination of higher oil and natural gas prices and improving oil refining margins helped fuel the increased profitability.
Unfortunately, the strong market conditions that helped drive its earnings higher in the first quarter vanished in the early days of Q2. Crude prices have crumbled due to concerns about how higher tariffs will impact the global economy. On a more positive note, Exxon is working hard to bolster its earnings capacity in the future.
NYSE: XOM
Key Data Points
A strong quarter
ExxonMobil provided some preliminary numbers for the first quarter. The company expects its earnings to be about $900 million higher than in the fourth quarter, when it reported $7.4 billion in profit. That would also put its profits up about $100 million compared to the first quarter of last year, when it posted $8.2 billion in income.
The company benefited from higher oil and gas prices in the quarter. Brent, the global oil benchmark price, averaged just under $75 per barrel, a 1.3% increase from the fourth quarter. Meanwhile, natural gas surged 30%, fueled partly by a cold winter in the U.S., which drove up demand. Exxon also benefited from higher oil refining margins in the quarter.
The strong start to the year might not last
While oil and gas prices rose last quarter, they've tumbled in the early days of the second quarter. Brent Crude has plunged more than 10% over the past week, falling to around $65 per barrel on tariff concerns. Meanwhile, the price of natural gas in the U.S. has fallen more than 5% this week.
If prices remain at their current levels or fall further, it will have a meaningful impact on Exxon's results in the coming quarters. Meanwhile, if tariffs slow the global economy, oil refinery margins would also take a hit, further impacting Exxon's profits.
Counteracting crude oil's volatility
While Exxon's profits might dip in the near term, the company's long-term earnings outlook is bright. Exxon is investing heavily in expanding its best resources, which have the lowest operating costs and highest margins. The company also continues to be laser-focused on stripping structural costs out of its business.
This strategy paid off last year. The oil giant delivered $33.7 billion of earnings and $55 billion in cash flow from operations, its third-best year in a decade. The company delivered that strong performance even though oil prices were in the middle of its 10-year annual range, while refining and chemical margins were much lower than average. It benefited from the growth in its highest-margin assets and its cost-saving initiatives.
Exxon's focus remains on continuing to execute this strategy. The company plans to invest about $140 billion by 2030 into developing its best assets. It also plans to achieve another $7 billion in structural cost savings. This plan has the potential to deliver an additional $20 billion of annual earnings and $30 billion of incremental cash flow by 2030.
The company based this plan on an average Brent price of $65 per barrel. So, the recent slump in crude prices wouldn't impact its ability to achieve this target. This strategy will also help cushion the blow of lower oil prices in the future.
Built to weather the industry's volatility
Oil prices will have a meaningful impact on Exxon's earnings in the near term. They boosted its profit in the first quarter and will likely hurt earnings in the second quarter. However, the company is investing heavily to grow its lowest-cost assets and cut costs, which should help mute more of the impact of oil price volatility over the coming years. Because of that, it remains a great oil stock to own over the long term, even if it might continue to be volatile in the near term.
