Last Friday, Exxon Mobil (XOM) reported adjusted earnings per share of $0.88/share versus expectations of $1.03/share for Q4 2017. The miss was a result of weakness in each of its segments, including upstream.
Within the upstream segment, Exxon missed production estimates as a result of international outages and the segment also experienced higher exploration costs. The production miss highlights that large integrated oil companies, such as Exxon, are having a difficult time keeping up with short cycle barrels of production meeting strong global demand in the new shale era. While Exxon highlights they are ramping up spending on low cost, short cycle supply in the premier Permian Basin, its exposure should remain relatively small given its large global integrated operations.
In our view, Exxon’s miss shows the benefit of owning independent exploration and production companies (E&Ps) with pure play exposure to U.S shale assets such as the Permian Basin. In a constructive oil price environment, we believe these companies will likely outperform integrated companies that have limited short cycle reserves and rely on expensive and risky offshore development projects for growth. The Exxon disappointment also highlights the value of deconstructing an integrated company’s segments into the best pure-play independent companies across the energy value chain within an energy portfolio. These non-integrated companies may boast higher returns than a behemoth such as Exxon Mobil as a result of more direct operating leverage to the underlying drivers of value. Additionally, the decline in XOM’s share price after the announcement reveals the danger of a highly concentrated energy investment portfolio comprised of a few supposedly “safe haven” companies such as XOM, as well as ETFs where integrated companies represent a large weighting.
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