It's a fair question after a quarter in which several of the majors failed to meet analyst numbers—and not by just a penny or two.
“Shell-shocked” was the line used by Macquarie Capital analyst Jason Gammel in commenting on Royal Dutch Shell's quarter. The miss was on the order of 23%, as Shell reported adjusted net income of $4.6 billion as compared to consensus estimates of $6 billion.
ExxonMobil's miss was on the order of $0.35 per share, about 18% below consensus. Its stock traded lower each day, except for one, in the two weeks following its second-quarter-results announcement.
For Shell, the miss was driven by poor upstream results, where costs were higher than forecast across the board.
“We are most concerned about the rising cost structure in upstream,” said Gammel, who noted that DD&A (depreciation, depletion and amortization) rates were up 20% and operating expenses were up 9% versus prior-year levels. “Shell's after-tax profit margin was $12.65 per barrel of oil equivalent (BOE), 25% below our estimate of $16.85 per BOE.”
Moreover, the headline earnings miss did not include a $2.1-billion impairment on the company's US liquids-rich shale portfolio, and the impairment did not reflect changes in commodity prices, but was attributed by management “entirely to their heightened understanding of the geology of their acreage,” said Gammel.
Shell is undertaking a portfolio review that is expected to result in a higher rate of property divestitures, focusing initially on assets in Nigeria and acreage in North American resource plays. The company has also “retired” its production target of 4 million barrels per day in 2017, a target several analysts had viewed as unattainable.
“We expect that the market will take comfort that Shell will not be chasing this target with higher levels of capital,” said Gammel.
However, concerns linger on the balancing of capex and cash flow at Shell and, as a result, its room to grow its dividend. Morgan Stanley analyst Martijn Rats notes Shell's target of an average $50 billion per year of operating cash flow in 2013-2015, but forecasts only $46 billion by 2015. With capex at $35 billion, free cash flow would be $11 billion versus a current dividend requirement of $11.5 billion.
A lower-than-expected refining sector contribution, as well as weaker international upstream results, were two factors in Exxon-Mobil's underperformance. Also sapping investor enthusiasm was the reduced pace guided for its share buyback program: $3 billion in the third quarter, down from $4 billion and $5 billion, respectively, for the first and second quarters of this year.
Given the premium valuation accorded ExxonMobil versus its peers, the case for owning ExxonMobil is questionable, says Credit Suisse analyst Edward Westlake, whose $90-per-share target price in early August stood a couple of points below the company's stock price. To justify the premium would require a recovery in international refining—unlikely any time soon—and greater clarity on the next round of reinvestment opportunities..
As an alternative, “there are select producers that offer superior leverage to the best plays in the shale revolution,” says Westlake. His report highlights a range of majors and independent producers that not only are priced at more modest multiples, but also offer greater liquids-rich shale exposure than ExxonMobil, whose shale position is described as “too gassy.”
In another report, Westlake says that since 2005 only two of the majors—Occidental Petroleum and Chevron—have delivered cash-flow growth matching the rise in oil prices. The report focuses on Chevron (20 cents light for the quarter, with earnings of $2.77), which is favored for a projected 5% to 6% compound annual growth rate in 2013-2017 and because it trades at “a decent discount” to ExxonMobil. Chevron also owns substantial acreage in the Marcellus and Utica shales and, importantly, some 1.5 million acres in the Permian, making it the largest acreage holder in the basin.
Interestingly, the report again highlights various producers' exposure to liquids-rich shale resource potential, where leverage clearly is in the E&P camp, with names like EOG Resources, Pioneer, Concho, Anadarko, Noble Energy and others. And to this leverage can be added some obvious trends: Not only do E&Ps have greater exposure to unconventional plays, but also they are growing faster, often are valued more attractively—and are not hampered by the negative momentum of the majors.
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