I think we can all pretty much accept the fact that when ExxonMobil (NYSE:XOM) reports earnings on July 31, chances are they won't be pretty. The average price of oil over the past several months hasn't really improved that much compared to the previous quarter, and normalized earnings estimates for the big oil giant of $1.08 per share are not that far off of last quarter's numbers.
It's rather easy to get caught up in the quarterly earnings minutiae as it will likely be the dominant story of the day. But if you own shares of ExxonMobil, you are probably in it for the long haul. So, when the company reports earnings, the most important thing to watch for is whether the company has made any significant changes to its production or its investment outlook. Here is a look at why the company may decide to change things up a little bit and also why the company may continue on as planned.
What might change
It's not normally in ExxonMobil's DNA to make drastic changes to its investment plans. It has a long history of investing through the ups and downs of the market. That is normally the case because it takes years to find, appraise, and develop a new oil and gas reservoir before it starts production. But there is one element of the oil and gas industry that has changed recently and that is the shortened development cycle of shale oil and gas.
Unlike the several months that it can take to bring a larger oil and gas field online, bringing a new shale well online can take a matter of days. For a company like ExxonMobil, this gives an immense amount of flexibility. Most independent oil and gas players in the U.S. are forced to keep on drilling and pumping oil at less-than-great prices just to keep the creditors at bay, but Exxon's strong balance sheet and ability to generate cash from other business segments allows it to change its shale drilling plans quickly if it chooses to do so. Today, ExxonMobil plans to grow 2017 shale production by 150,000 barrels per day from 2012 levels, but if it needs to conserve capital spending without compromising long-term production growth, shale gives it the options to do so.
The other thing investors should watch for when it comes to ExxonMobil's long-term plans is whether it decides to cut its share repurchase program any more. Back in February, management said it was cutting its share repurchase program to $1 billion quarterly. Although last quarter it did buy back about $1.7 billion instead. ExxonMobil could decide to cut its share repurchase program even further, which would likely not be well received. Considering that shares are trading at such a discount to what they were just a few months ago -- by ExxonMobil standards -- let's hope management keeps its buyback plan in place.
Why things will probably stay the same
Like I said, it's not really in ExxonMobil's DNA to change much. The thing is, though, the company doesn't really have to. Not only does the company have the balance sheet and credit strength to weather these market storms, but its production plans are based on much more conservative plans than its peers.
When a company like ExxonMobil makes its production outlook, it does so using a certain price for a barrel of oil. Whatever price is used can say a lot about whether those production goals are attainable or not. According to management's guidance that it gave during its March analyst day presentation, its production growth of 300,000 barrels per day between 2014 and 2017 are based on the price of Brent oil at $55 per barrel. This means that even at today's depressed prices, new production from ExxonMobil can eek out a very small profit. That might not sound great, but when you compare it to its peers' price assumptions, it makes ExxonMobil's plans that much better.
|Company||Price assumption for production guidance (Brent crude)|
|BP||$80 (projects "stress tested" for $60)|
This probably means that if any of these companies lower their production guidance, ExxonMobil will be the last one to do it because its new projects are the most capable of handling lower prices.
What a Fool believes
ExxonMobil has long been considered the bastion of safety for energy investing, but even its earnings and share prices have not been immune to the current market. If you as an investor in ExxonMobil are concerned about the more long-term impacts of what is going on today, then look to see if it has made any material changes to its investment plans. With some of the most conservative capital planning in the business, chances are ExxonMobil won't.