Why ExxonMobil missed 2Q13 earnings expectations (Part 6 of 6)
ExxonMobil guided to lower stock buybacks in 3Q13 versus 2Q13
Stock buybacks reduce the number of shares outstanding, thereby increasing earnings per share (EPS). ExxonMobil bought back ~$4 billion worth of stock in 2Q13, but pulled back to ~$3 billion in 3Q13. Investors may have been disappointed with the guidance to lower stock buybacks this quarter. In 1Q13, XOM bought back ~$5 billion of shares.
Regarding its share buyback program, ExxonMobil management commented, “There is nothing magical about the $3 billion number for the third quarter, other than we had just taken a look at —like we always do—expected cash flows for the quarter, our needs, cash requirements and that sort of thing, and just came up with the $3 billion number. We are also managing our capital structure this year and keeping that in line with our longer-term objectives but not any more complicated than that.”
XOM has outspent cash flow through 2013 so far
Given XOM’s cash burn through 1H13, it’s possible that the company could further reduce its rate of stock buybacks after 3Q13. During 2Q13, XOM generated ~$8 billion of cash through ongoing operations asset sales (though that includes ~$3.6 billion in cash use for working capital, which is abnormally high), spent $8.7 billion in cash on additions to PP&E (property, plant, and equipment costs), and $6.8 billion on shareholder distributions for a net cash burn of ~$7.5 billion.
In 1Q13, XOM had $14 billion in cash flow from operations, including asset sales, spent $7.5 billion in cash on additions to PP&E, and made distributions of $7.6 billion for a cash burn of ~$1.1 billion. If cash flow from ongoing operations continues to be below the sum of cash spent on buybacks or dividends and cash spent on capex (for which guidance was $41 billion for 2013, including ~$3.1 billion for a major acquisition), XOM will likely scale back its share repurchase program unless it plans on performing a major asset sale or materially increasing leverage.
Possibility of scaling back stock buyback program even further
So, given XOM’s guidance of ~$41 billion for capex in 2013, it plans to spend ~$10 billion per quarter on capex in 3Q13 and 4Q13. Plus, at current run rates and share counts, XOM will pay ~$2.8 per quarter in dividends. This means that XOM must achieve ~$13 billion in cash flow from operations per quarter to remain cash-neutral—even before share repurchases. For 3Q13, XOM has guided already to ~$3 billion in share repurchases, meaning that the company must achieve ~$16 billion in cash from operations to remain cash-neutral.
XOM has generated cash from operations and cash flows of ~$14 billion per quarter for the past five quarters, except for 2Q13, where an earnings miss due to planned refinery downtime and a large negative swing in working capital caused the company to generate only ~$8 billion of cash. So XOM needs to either generate more cash than it historically had from its operations, or scale back capex to maintain its ~$3 billion per quarter buyback program. Given that the downstream environment has worsened for XOM since 1H13 and XOM’s chemical segment is a small and relatively stable part of the company’s portfolio, this seems only feasible with a material improvement from the company’s upstream business. Oil prices have indeed increased sharply from 2Q13 to 3Q13, which could help to plug some of the shortfall. But if oil prices fall back down, XOM could find itself running at a significant cash deficit again, which could lead to a reduction of the stock buyback program.
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