The Positives Behind Exxon Mobil’s Earnings

The sharp drop in equities since Friday is notable for missing any obvious catalyst. Interest rates have been headed higher, but they’re far too low to offer value and the Equity Risk Premium continues to strongly favor stocks over bonds. A sharp move higher in interest rates could shift relative valuations away from bonds, but we’d need to see rates 1-2% above where they are today.

Earnings have generally been good, but Exxon Mobil (XOM) disappointed with their report on Friday morning and duly dropped 10% over the following two trading sessions. They missed expectations across each segment. They have failed to make money in U.S. oil and gas production for over two years, and their refining margins were also squeezed.

However, XOM’s travails shouldn’t tarnish the outlook for energy infrastructure. First, they announced plans to invest $50BN in the U.S. over the next five years. CEO Darren Woods singled out the Permian Basin in West Texas and New Mexico as an important target for some of this capital investment. This is exactly what energy infrastructure investors should be excited about. It’s evidence that the world’s biggest energy companies recognize the value in the Shale Revolution. Unconventional “tight” oil and gas formations offer rapid payback for a small initial investment. Capital invested is often returned within two years, allowing price risk to be hedged in the futures market. In Why Shale Upends Conventional Thinking , we noted last year that XOM’s CEO expected a third of their capex to be devoted to such opportunities. In response to a question on their recent earnings call, VP Jeff Woodbury replied, “…While we continue to invest across all segments, this increase compared to 2017 is primarily driven by higher investment in short-cycle Upstream opportunities, notably U.S. unconventional activity and conventional work programs, both of which yield attractive returns at $40 per barrel.” Woodbury continued, “As I indicated before when we were talking about the five-year projection of $50 billion, that is a very attractive investment. We’ve got – at a low price forecast we’ve got returns in excess of 10% with a $40 per barrel…”