Exxon Mobil Corporation’s (XOM) Government Suit Is a Nothing Burger
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Headlines about the lawsuit Exxon Mobil Corporation (NYSE:XOM) just filed against the U.S. government are drowning out the fact that the diversified energy giant is set to report second-quarter fiscal 2017 earrings results next week. And for XOM stock holders, that’s a more important event to focus on.
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The Houston-based company is challenging to the Treasury Department’s Office of Foreign Assets Control ruling that Exxon violated U.S. sanctions against Russia in 2014, thus must pay a $2 million fine related to actions it took between May 14 and May 23, 2014 under the leadership then CEO Rex Tillerson, who is now the Trump Administration’s Secretary of State.
The Suit Doesn’t Alter XOM’s Course
Although $2 million is a drop in the bucket for Exxon, which generates $25 billion in operating cash flow, it’s nonetheless a matter a principle. Exxon insists it followed authoritative Obama-era guidance in its dealings with Russia. Yet, OFAC believes it is in its power to retroactively change the guidelines one year later. Regardless of what the outcome is, it doesn’t change the long-term narrative for the company and what has been a remarkable track record of execution, especially amid chronic low oil prices.
Brent crude prices averaged below $50 in the second quarter and estimates suggest that average prices could top out at $54 for the year. But XOM stock, which which pays 3.8% annual dividend yield, is not going anywhere and — with $60 oil no longer a possibility — the company is advancing more cost-cutting measures to squeeze out as much profits as it can. Nor is the market pricing in the earnings growth Exxon management is working to deliver in the quarters ahead.
And with fiscal 2018 earnings-per-share estimates of $4.02, calling for 13% growth, XOM stock should reach $95 to $100 in the next 12 to 18 months, delivering 18% to 25% returns.
Looking Ahead at XOM Stock
The company’s earnings results comes on Friday, July 28. For the quarter that ended June, Wall Street expects XOM to post earnings of 84 cents on revenue of the $61.92 billion, translating to year-over-year growth of 104% and 7.3%, respectively.
For the full year, ending in December, earnings are projected to rise 49% year-over-year to $3.53 per share, while revenue of $266.81 billion would rise 18% YOY.
The fact that earnings for both the quarter and full year are projected to grow by breathtaking levels underscores the deficits XOM — as with leading oil majors such as Chevron Corporation (NYSE:CVX), BP plc (ADR) (NYSE:BP) and ConocoPhillips (NYSE:COP) — are emerging from. In other words, it’s a year of transition for these companies. In the case of XOM stock, however, which is fresh on the heels of a strong first-quarter earnings report — the company’s highest quarterly profits in over a year — the company has found ways to balance cost cuts with meaningful investments for growth.
Exxon’s three main operating segments of Upstream, Downstream and Chemicals, have helped the company’s profits remain positive throughout the drop in oil prices. And with its acquisition of InterOil in 2016 and its May acquisition of a refining and petrochemical plant owned by Jurong Aromatics (JAC) in Singapore — a move aimed at boosting its output and meet demand in Asia — the company’s increased production capacity gives it an extra advantage over its peers if or when oil prices rebound.
Bottom Line on Exxon Stock
Investors would do well to ignore all of the noise and focus on the stability and best-of-breed status XOM stock has established among its oil peers.
And this explains why despite lower oil price Exxon stock — down 11% year-to-date — hasn’t been punished to the extent of some of its peers within the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE), which has fallen 13.5%. All told, the company’s strong upstream assets gives XOM the sort of advantage it needs to deliver significant shareholder returns once the oil prices start to rise.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
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