Categories Analysis, Energy

Exxon Mobil (XOM) might need more than Capex discipline to survive COVID

While the core downstream and upstream businesses registered a loss in Q4, the chemicals segment remained profitable

With the COVID-related uncertainty continuing across markets, energy companies are faced with the tough challenges of subdued demand and faltering liquidity. It is time for the oil and gas industry, which is considered a key contributor to economic growth, to start preparing to adapt to the new market conditions. The financial performance of Exxon Mobil Corporation (NYSE: XOM), America’s largest oil exploration company, in 2020 was the worst in its history. Last year, it recorded an annual loss after several decades.

In what could be the sign of a rebound, the company’s stock recovered from the historic lows seen early last year. It looks poised to return to the pre-COVID levels this year, thanks to the strong fundamentals and new operational restructure with focus on Capex discipline. For new investors, it is the right time to add the stock to their portfolios, while those who already own it can hold, since the revised target price indicates a 10% growth this year.

A Bad Year

Exxon’s operations continue to be impacted by the COVID-induced disruption and the company ended fiscal 2020 on a low note, though the quarterly performance improved sequentially in the final months of the year. In the fourth quarter, adjusted earnings plunged to $0.03 per share hurt by a 31% fall in revenues to $46.5 billion. Earnings exceeded estimates, while the top-line missed. While the main downstream and upstream businesses registered loss, a modest improvement in the chemicals business came as a relief.

Reorganization

According to the management, the organizational restructuring started earlier came in handy in navigating through the crisis. That, combined with the improvements in cost structure, should enable Exxon to ease the impact to a great extent. It needs to be noted that the company has achieved significant cost-saving and successfully completed the majority of its capital projects – though it weakened the cash position and added to the strain on the balance sheet. The Capex plan for the current year is relatively modest.

Exxon Mobil Q4 2020 Earnings Infographic

We delivered on our cost reduction objectives and outperformed our revised plan, which we shared with you in April. Going forward, we’re continuing to work to reduce cost by leveraging synergies from aligned organizations and work processes across the Upstream, Downstream, and Chemical. Further opportunities are being identified to reduce the cost to drive cash flow and maintain our capital allocation priorities, including paying a strong dividend and maintaining a fortified balance sheet that we deleverage over time.

Exxon Mobil’s CEO Darren Woods

Read management/analysts’ comments on Exxon Mobil’s Q4 report


On the other hand, the faltering cash flow might become an impediment for the company when it comes to debt repayment, and the low oil prices will weigh on profitability. It is estimated that things would not be the same for the energy sector in the post-COVID era, because the crisis is unique and its economic fallout is devastating. Adding to the woes of oil companies is the emergence of shale, oversupply, and competition, which have brought the industry to a crossroads.

At the Bourses

After slipping to a ten-year low in the early days of the pandemic, Exxon’s stock stayed subdued throughout 2020, except for a short-lived recovery mid-year. But things changed for the better towards the end of the year and the stock rose above the $50-mark for the first time in more than six months. XOM traded slightly higher in the early hours of Wednesday’s session.

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