Exxon Misses Due To Lower Gas Prices And Margins, On Pace For $32 Billion Shareholder Payout

Having previously preannounced that Q2 results would fall short of expectations for the earnings juggernaut investors have come to expects from US energy giants, this morning the US supermajor Exxon joined European peers Shell and Total in missing 2Q earnings estimates with a third straight drop in profit - the longest decline since the 2014-2016 oil-market crash -  amid weaker natural gas prices and shrinking returns from fuel sales.

The earnings miss - the company's first in five quarters - comes after analysts downgraded expectations substantially after Exxon’s guidance earlier this month, and was mostly due to lower gas prices and refining margins with overall net income of $7.9 billion less than half that of a year ago. Still, despite the drop in energy prices (which have in recent weeks rebounded sharply), Exxon maintained its share buyback, and it’s on course to repurchase $17.5 billion this year. Combined with the dividend, Exxon’s $32.5 billion of shareholder returns would be the highest since 2008, and the 4th highest in the S&P 500 Index

Here is what Exxon reported for Q2:

• Revenue $82.91 billion, beating est of $82.31 billion , down from $115.68 billion a year earlier
• Adjusted EPS of $1.94 per diluted share, missing est of $2.00, down from $4.14 a year earlier.
• Worldwide production came in at 3,608 MBOE/d, missing consensus at 3,728 MBOE/d,
  • Energy products adjusted net income $2.29 billion, missing estimates of $2.52 billion
    • Exxon’s record quarterly Permian production was the equivalent of 620,000 barrels of oil per day in the second quarter
  • Chemical products adjusted net income $828 million, beating estimates of $731.4 million
  • Specialty products adjusted net income $671 million, beating estimates of $658.2 million
• Despite the modest miss, Exxon stuck with its generous stock-buyback program, which is on course for $17.5 billion annually.

Some more details:

•  Exxon grew production from the Permian and Guyana by 20% in the first half, though overall production dropped to 3.6 million barrels a day, among the lowest in two decades.Despite record Permian quarterly production, Exxon posted lower-than-expected total daily output companywide, missing consensus estimates by about 3%.

• It marked a steady decline from the 4.5 million barrels a day it pumped back in 2011, and also lower than when Exxon and Mobil merged more than two decades ago. But CEO Woods has said he doesn’t mind, as long as the barrels Exxon is pumping are profitable. That’s why he talks so much about Guyana and the Permian, which are among the world’s most lucrative.

• Crude oil, NGL, bitumen and synthetic oil production 2,353 KBD
• Refinery throughput 4,173 KBD
• Energy Products 2Q totaled $2.3 billion, down $1.9 billion from the first quarter. Industry margins declined sequentially from a strong first quarter on weaker diesel margins as Russian supply concerns eased

• While crude, natural gas prices and refining margins are all within the 10-year average, petrochemical margins are well below the range, Exxon said in the presentation. Chemicals was supposed to be the future of fossil fuels but the industry is facing severe price challenges due to new supply. Exxon's chemical prime product sales were 4,849 kt.

• Upstream adjusted net income $4.58 billion, missing est. $4.79 billion

• In the Permian, Exxon expects to generate the equivalent of 600,000 barrels of oil per day for this year, and that should grow to 1 million per day by 2027. The company says it’s continuing to rebuild its supply of drilled-but-uncompleted wells. Meanwhile, Permian growth appears strong, on course for a 10% increase this year. That, according to Bloomberg, would be a big change from the overall US oil industry, which has depleted the supply of ready-made wells every month this year. That’s key to watch because at some point, shale explorers will have to start drilling more than they frack, or else their supply of future quick-turn production will dwindle.

Commenting on the results, CEO Darren Woods said that "the work we’ve been doing to improve our underlying profitability is reflected in our second-quarter results, which doubled from what we earned in a comparable industry commodity price environment just five years ago”

The company also explained that lower natgas realizations and industry refining margins adversely impacted earnings, while the results benefited from the absence of prior quarter unfavorable derivative mark-to-market impacts.

As noted above, energy Products 2Q totaled $2.3 billion, down $1.9 billion from the first quarter. Industry margins declined sequentially from a strong first quarter on weaker diesel margins as Russian supply concerns eased

“This reflects the significant opportunity to profitably grow our Low Carbon Solutions business by creating a compelling customer decarbonization proposition with the potential to reduce Gulf Coast industrial emissions by 100 million metric tons per year.”

Q2 capital and exploration expenditures were $6.2BN and $12.5BN for 1H, in line with full-year guidance of $23b to $25b

The company also announced second-quarter shareholder distributions of $8.0 billion, which included $4.3 billion of share repurchases and $3.7 billion of dividends. For the full year, Exxon’s $32.5 billion of shareholder returns (including $17.5BN in buybacks) would be the highest since 2008, and the 4th highest in the S&P 500 Index. Yet somehow, instead of cold hard cash, investors would rather buy into the AI hype...

Incidentally, Exxon’s free cash flow was "only" $5 billion in the quarter, not enough to cover the $8 billion of dividends and buybacks. But the oil giant has so much cash on hand from recent quarters that it was easily able to fund the payouts.

Looking ahead, Exxon said it was on track to structurally reduce costs by $9 billion at year end compared to 2019.  The company also sees 3Q Corporate & Financing Expenses $400M-$500M.

For Q3, Exxon also said that it expects higher volumes for upstream on lower scheduled maintenance. Expect further questions from analysts on the call today about that.

The sellside reactions were mixed: RBC said the results this morning were a negative.

“Today’s results came in slightly weaker than expected across earnings and cash flow, and we would expect XOM to underperform the peer group today... Our recent downgrade of XOM was predicated on strong performance relative to peers, coupled with the potential for weaker earnings momentum from a more modest macro environment across oil, gas and refining and XOM’s 2Q results are evidence of this.”

Goldman analyst Neil Mehta also chimed in, noting that Exxon's Cash flow was in-line relative to GS expectations during the quarter at $13.0 bn excluding working capital and asset sales versus GS at $13.0 bn: "Relative to our numbers, US E&P and Corporate were contributors to the miss from an earnings standpoint. Worldwide production came in at 3,608 MBOE/d vs GS at 3,723 MBOE/d and FactSet consensus at 3,728 MBOE/d, with lower liquids/gas vs our estimates across regions. For the conference call, we expect the company to focus on (a) Refining and global Gas outlook, (b) update on structural cost savings efforts, (c) real-time product demand commentary, and (d) discussion on proposed Denbury acquisition and ability to repurchase shares in the interim."

Exxon stock slumped 2% in early trading, underperforming peer Chevron, which was down 0.8% and which also reported results earlier today.

Exxon's full investor presentation is below.