ExxonMobil (XOM) moves to Hold
Our latest recommendation, ExxonMobil, pulled back sharply after reporting earnings Friday morning. Our timing was lousy: XOM was added to our portfolio at 86.90 on Thursday and fell 6% on Friday. It’s inherently challenging adding new positions during earnings season, and with earnings expectations for Exxon so strong, we didn’t take enough precautions to limit our risk.
We’ll keep that lesson in mind next earnings season, but in the meantime, what do we do with Exxon? For now, I’m moving the stock to hold while we wait to see if the selloff resolves or worsens.
The biggest disappointment in the earnings report was a decline in cash flow from operations. Lower refining and chemical margins played a part, but a 3% drop in production was the most worrying contributor to the decline. Production declined everywhere except the U.S., and analysts peppered Exxon representatives with questions on the earnings call.
Two-thirds of the production declines were due to divestments or changes in production sharing ratios triggered by higher oil prices, while another third was due to “field decline,” which is a long-term concern. Management will be talking about their plans to reinvigorate production at the March 7 analyst meeting, and didn’t provide many details on the call.
Exxon’s 3.5% dividend remains well-covered by cash flow, so investors whose top priority is Safe Income don’t need to reconsider their strategy here. But investors who were also buying XOM for capital gains should hold off for now until the stock’s uptrend is re-confirmed. Wall Street will get a lot more details on Exxon’s strategy after the analyst meeting in a month, and we should have more clarity on the stock’s strength then as well.