Exxon Mobil's Earnings Bounce Back

After finishing 2020 on a sour note with a record loss, Exxon XOM started off 2021 on the right foot posting year-over-year earnings growth on rising commodity prices and strong chemical margins. Downstream margins remain a point of weakness, stuck below trailing 10-year averages. Other integrated oils are suffering from the same conditions, but Exxon more so given its relatively large downstream footprint. This is part of our thesis, however, as we expect a recovery back toward historical levels, which Exxon should be a primary beneficiary. Meanwhile, it should also benefit from the lift in oil and natural gas prices. While its carbon strategy has continued to garner criticism, we find it prudent. Combined with a more restrained capital budget reiterated at last month's annual analyst day, we think investors will begin to come around given its low valuation. As such, it remains our preferred name in the sector. Our fair value estimate and moat rating are unchanged. Exxon reported earnings of $2.7 billion compared with a loss of $610 million in the first quarter last year and a $20.1 billion loss in the fourth quarter due to impairments. Adjusted earnings for the quarter were $2.8 billion compared with adjusted earnings of $2.3 billion a year ago. Earnings were negatively affected by nearly $600 million from the impact of the Texas winter storm during the quarter. Operating cash flow totaled $9.3 billion during the quarter, or $7.6 billion excluding asset sale proceeds and working capital. This was enough to cover capital spending and the dividend as well as reducing $4.0 billion of debt. As a result, net debt to capital fell to 28% from 29% at the end of 2020. Management plans to apply excess cash beyond the dividend the remainder of the year toward debt reduction and targets a 20%-25% net debt to capital.

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