ExxonMobil, the world’s largest publicly traded oil company, posted lower-than-expected on Thursday.
Trouble is, this isn’t a one-quarter problem for Exxon and its competitors, says Deutsche Bank analyst Paul Sankey.
“There’s no point in looking for growth in these names, and there’s no point in looking for rising returns,” said Sankey.
Along with a net profit drop, Exxon said oil and natural gas production had pulled back more than 5 percent last quarter. At the same time, competitor ConocoPhillips said its first-quarter profit dropped on decreased production levels.
“The crux of problem is a growing oil supply, but when it comes down to it, Exxon’s sheer scale makes it difficult to grow,” he added.
In Sankey’s view, today’s demand, amid a supply glut, is not accelerating at a rate that would push oil prices — and oil companies — out of their rut.
“We still have rising demand for oil, we still have a growing economy, but[Brent crude’s] at $120 a barrell. That’s very bullish,” he explained. “Fundamentals have overtaken geopolitical risks to hold the price where it has been. I don’t see a $15 premium.”
These challenges, however, didn’t stop Sankey from raising Exxon to a “buy” rating from a “hold” on April 18. He had been betting on a dividend hike.
“What we’re seeing is a group where you don’t have a lot of growth, if any, and you’ve got falling returns,” said Sankey. “If that’s the case, then what you have to buy is cash return to shareholders.”
The bet panned out. Exxon raised its quarterly dividendby 21 percent on Wednesday, bowing to sustained pressure from both investors and Wall Street analysts.
“We never said we thought we’d see good earnings from the company. The challenge here is huge excess cash flow with nowhere to put it,” said Sankey. “That’s when you give it back to shareholder, and they did that.”
For now, Sankey is playing his “cash-return defense” strategy, and Exxon fits the bill.
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Paul Sankey does not personally own shares in either XOM or COP. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
Follow Jennifer Leigh Parker on Twitter @jparker741.