When one of the biggest companies in the world reports earnings, you can bet the market pays close attention. Particularly, when that company has struggled throughout the entire year, it's especially important to see what, if any, improvements have been made to the business.
Integrated energy juggernaut ExxonMobil (NYSE:XOM) has reported its third-quarter earnings, and while it's worth noting that one quarter doesn't make or break a company, there are items underneath the headline numbers that investors should pay close attention to. Specifically, here are two notes of particular importance.
Refining is extremely weak, but (slightly) improving
In all, Exxon's quarterly profit fell by $1.7 billion year over year, to $7.8 billion. Exxon performed well in certain segments, including its upstream operations, thanks to higher volumes and lower exploration costs. Unfortunately, downstream earnings continue to collapse due to an extremely harsh environment for refining.
The troubles facing refining activities have been well documented. Higher prices of domestic crude, specifically West Texas Intermediate, compared to the international benchmark, have resulted in crimped refining margins. It has been known for some time that refining is a major anchor on the integrated majors, as it has negatively affected results for several quarters in a row.
Other integrated majors have been equally afflicted by poor refining performance. Royal Dutch Shell (NYSE:RDS-A), for instance, reported its third-quarter earnings fell 32%, due to downstream earnings dropping by nearly half from the same period last year.
As a result, investors and analysts alike were eagerly awaiting any signal that Exxon's refining may turn a corner. And, while refining results were still very poor, there are at least noticeable signs of improvement.
In total, Exxon's downstream business, which includes refining activities, generated $592 million in earnings during the third quarter. That compares to $3.2 billion in earnings from the downstream segment in the same quarter last year, representing a $2.6 billion drop in downstream profitability year over year.
At the same time, Exxon did show sequential improvements in its downstream operations. Downstream earnings increased by $196 million in the third quarter from the second quarter, driven mostly by lower planned maintenance costs. If you're looking for a silver lining, you can at least say that progress was seen from a quarter-to-quarter perspective, so the trend is getting better.
Weak profits mean less cash for buybacks
A critical piece of ExxonMobil's capital allocation is its share repurchasing program. As many investors have noticed, Exxon carries a significantly lower dividend yield than many of its peers, at about 2.9%. Royal Dutch Shell, for all its woes, pays investors a hefty 5% dividend yield. Even BP (NYSE:BP), still grappling with tens of billions in damages stemming from the Gulf of Mexico spill, offers a 5% yield and recently upped its dividend.
The disparity between Exxon's payout and the dividends of other integrated energy majors, especially matters when times are tough, as they are now. Exxon's shares have languished as its profits took a hit and are actually down over the past year. As a result, investors aren't seeing tangible benefits from Exxon's aggressive share repurchases. And, as profit declines, so too does the amount of cash available for further buybacks.
Keep in mind that Exxon repurchased $5 billion of its shares in the first quarter, and up until then had bought back at least $5 billion of its own stock for the previous ten quarters in a row. Exxon then reduced its buybacks to $4 billion in the second quarter, and repurchases declined again to $3 billion in the third quarter. Furthermore, Exxon projects fourth-quarter buybacks to total $3 billion as well. It's not a surprise that buybacks are slowing given the tough operating environment, but it's a bad sign nonetheless.
Of course, it's only fair to mention that Royal Dutch Shell and BP also buy back shares, just not to the extent of ExxonMobil. Royal Dutch Shell spent $1.5 billion on repurchasing its own shares in the most-recent quarter, and BP bought back $2.9 billion of its stock through the first two fiscal quarters.
Foolish final words
As a result, while production difficulties and poor refining results continue to put a damper on all the integrated majors, investors may find BP and Royal Dutch Shell to be better places to park their cash than ExxonMobil. BP and Royal Dutch Shell, and their 5% dividend yields, may prove more attractive in an environment where ExxonMobil's buybacks aren't increasing the stocks price.