Exxon's Earnings Peak in 2008

Exxon’s Earnings Peaked Last Year, But Will Bottom in 2009

Earlier today, ExxonMobil (XOM) reported better-than-expected fourth-quarter 2008 earnings of $1.55 per share or $7.8 billion, down from $2.13 per share or $11.7 billion in the year-earlier quarter. The steep fall in oil prices caused a more than 47% drop in earnings from the preceding quarter. For the full-year 2008, total earnings were a record $44.1 billion, up from $40.6 billion in 2007.

Exxon’s earnings follow oil prices. And since the price of oil is not expected to get anywhere close to its summer 2008 peak anytime soon, we can safely say the same about Exxon’s earnings as well. Exxon’s earnings and cash flows peaked in 2008, but will most likely bottom in 2009. Given the unfavorable macro backdrop, Exxon’s total 2009 earnings could be about half of its 2008 record, with the outlook improving in the following years.

Exxon remains better positioned, operationally as well as financially, than any other company to navigate the current choppy waters. Its capital discipline, cost controls, and operating efficiencies are legendary, to say the least. Exxon stuck to its conservative project selection criteria through the boom years, using very low oil prices to determine hurdle rates.

And instead of making pricey acquisitions or investing in dubious projects, as many of its peers did through the cycle, it returned the excess cash it generated to shareholders through a growing dividend and share buybacks, while continuing to invest growing amounts in exploration and production [E&P] activities.

Exxon generated almost $60 billion in operating cash flows in 2008 (it raised an additional $6 billion through asset sales) and distributed a little over $40 billion to shareholders ($32 billion in buybacks and $8 billion in dividends) and spent over $26 billion in capital expenditures. It has paid a growing dividend in each of the last 26 years.

While dividends and capital expenditures are not expected to drop in response to the commodity-price pullback, the pace of buybacks will have to slow down. On the earning call, management indicated that buybacks will total around $7 billion in the first quarter of 2009, lower than the roughly $8 billion quarterly average of the last many quarters, but still a very impressive number given the macro environment.

We continue to rate Exxon shares a Buy. We believe that Exxon shares not only provide investors with a strong defensive shield in the current turbulent environment, but also enable them to get full exposure to the all-important energy sector.

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