Exxon Takes Hit on Noncash Charges, Worst Still to Come

Exxon XOM reported a first-quarter loss of $610 million compared with earnings of $2.4 billion last year. First-quarter earnings included $2.9 billion in noncash charges, largely from inventory valuation effects, but also asset impairment charges. Operating cash flow, including asset sales, was $6.4 billion compared with $8.4 billion last year. Upstream earnings fell to $536 million from $2.9 billion last year due to lower commodity prices, which offset a 2% growth in production driven by a 7% increase in liquids volumes. Excluding entitlement effects and divestments, production rose 5% with liquids 9% higher, led by growth in the Permian and Guyana. Upstream adjusted earnings fell to $1.2 billion from $2.2 billion last year. Downstream earnings fell to a loss of $611 million from a loss of $256 million last year as positive derivative effects and lower expenses were offset by noncash inventory valuation and impairment charges. The reported figures obscure the strength of the downstream which, without the inventory valuation charges, would have reported a year-over-year increase in adjusted earnings to $1.3 billion from $900 million last year. Chemical earnings fell to $144 million from $518 million, largely on noncash inventory valuation. Adjusted chemical earnings increased to $466 million from a loss of $355 million last year, marking its best quarter since first-quarter 2019. Our fair value estimate and moat rating are unchanged.

Although Exxon performed well during the quarter the worst is yet to come with CEO Darren Woods indicating April likely marked a trough in demand, but commodity prices and demand remain weak with the path of recovery uncertain. Exxon will also see economic shut-ins and curtailments of 400 thousand barrels of oil equivalent per day, or mboe/d, during the second quarter. We continue to view the dividend as safe, however, in light of Shell’s earlier decision to cut their payout.

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