HSBC Cut ExxonMobil’s Target Price before Q4 Earnings

So far, ExxonMobil (NYSE:XOM) stock has been weak in 2020. Despite the rise in oil prices driven by US-Iran tensions, ExxonMobil’s stock price has been flat year-to-date. Also, Wall Street analysts are cutting their target prices on ExxonMobil stock.

HSBC cut its target price on ExxonMobil stock from $74.5 to $74. Independent Research lowered its target on the stock from $73 to $71. Analysts might be changing their target prices in anticipation of the company’s fourth-quarter earnings.

Before we proceed with the company’s fourth-quarter earnings expectations, we’ll review how analysts rate ExxonMobil stock.

Analysts’ ratings for ExxonMobil stock

Wall Street analysts have mixed opinions about ExxonMobil stock. Along the 25 analysts, four analysts or 16% rate it as a “buy” or “strong buy.” Meanwhile, 20 analysts or 80% rate the stock as a “hold,” while one analyst rates the stock as a “sell.” Analysts’ mean target price is $79, which implies 13% upside potential.

Chevron’s mean target price of $136 shows a 16% upside potential. About 68% of the analysts have a positive rating for Chevron. However, 58%, 62%, and 86% of the analysts rate Royal Dutch Shell (NYSE:RDS.A), BP (NYSE:BP), and Total (NYSE:TOT) as a “buy” or “strong buy.” Based on the mean target prices, Shell, BP, and Total stocks have higher upside potentials at 28%, 27%, and 24%, respectively.

Weak energy environment in Q4

ExxonMobil has an integrated energy model, which includes upstream, downstream, and chemicals. In the fourth quarter, the energy environment was weak in terms of crude oil prices, oil spreads, the refining margin, and the chemical margin.

Although oil prices rose in the fourth quarter, they were lower on a sequential basis. There was uncertainty about US-China relations, which impacted the oil demand outlook. Oil markets are expected to face supply glut in 2020. In December, OPEC and its allies decided to deepen the production cuts. The decision was aimed at removing extra barrels of oil from the market.

ExxonMobil’s upstream outlook

In the third quarter, ExxonMobil’s upstream earnings were $2.2 billion.

In the fourth quarter, the company expects a change in gas demand to have a positive impact on upstream earnings by $0.2 billion sequentially. The gas demand was high due to increased gas requirements in Europe.

In the third-quarter earnings conference call, Neil Hansen, ExxonMobil’s vice president, investor relations and secretary, said, “And as you know, gas demand is highly seasonal and driven by weather conditions. Fourth quarter gas demand has been on average 150,000 oil equivalent barrels per day higher than the third quarter, and we expect a similar trend to occur this year.”

However, the company expects the change in planned maintenance to impact upstream earnings by -$0.1 billion–$0.1 billion. ExxonMobil expects a fall in liquids prices to impact the upstream earnings by -$0.1 billion and $0.1 billion sequentially. In the quarter, oil prices like Brent and WTI declined sequentially by $0.3 per barrel and $0.2 per barrel, respectively.

Also, ExxonMobil expects a slight rise in natural gas prices to impact the upstream earnings by -$0.1 billion and $0.1 billion sequentially. In the fourth quarter, Henry Hub natural gas prices rose by $0.1 per MMBtu.

The sale of upstream assets in Norway will add about $3.4 billion and $3.6 billion to upstream earnings.

ExxonMobil’s downstream guidance

ExxonMobil’s earnings in the downstream segment were $1.2 billion in the third quarter.

In the fourth quarter, oil spreads have put up a mixed trend. While the WTI Houston-WCS oil spread rose by $6.3 per barrel sequentially, the WTI Houston-WTI Midland spread fell by $1.4 billion. The company expects changes in spreads to impact the earnings by -$0.1 billion sequentially.

ExxonMobil expects the decline in refining margins to impact its earnings by -$0.8 billion to -$0.6 billion sequentially. The company expects the changes in scheduled maintenance to impact its earnings by -$0.3 billion to -$0.2 billion sequentially.

The planned maintenance was higher in the fourth quarter in anticipation of IMO 2020. According to the new regulation, shippers globally are required to use low-sulfur fuel starting this month. There will need to be an adjustment in the configuration of refining assets, which would have led to more downtime.

Chemical earnings

ExxonMobil’s chemical earnings were $0.2 billion in the third quarter. In the fourth quarter, the company expects the weakness in chemical margins to impact its earnings by -$0.5 billion to -$0.3 billion sequentially. The recent additions to the capacities in the industry could have led to the suppression in chemical margins.

Fourth-quarter expectation

ExxonMobil’s upstream earnings could remain flat or see marginal movements. However, the company’s downstream profits could fall due to lower refining margins and planned maintenance activities. Also, the company’s chemical earnings could fall due to lower chemical margins.

As a result, Wall Street analysts expect ExxonMobil’s total earnings to fall by 21% sequentially in the fourth quarter. In comparison, analysts expect BP’s earnings to rise by 2% sequentially. BP is the only integrated energy company expected to post a sequential increase in profits. Read Is Wall Street Warming Up to BP Stock? to learn more.

However, analysts expect Chevron, Shell, and Total’s earnings to fall sequentially by 2%, 18%, and 14%, respectively.

What to expect

Analysts expect ExxonMobil’s fourth-quarter earnings to fall. The expectation could impact the stock until the earnings release. Analysts might be cutting the target price on the stock to account for weaker upcoming earnings.

In 2020, most analysts expect ExxonMobil’s earnings to rise by 47%—the highest among its peers. The company has a strong upstream portfolio, which could drive its production growth. ExxonMobil’s downstream asset base seems well placed to handle the IMO 2020 period. The regulatory changes in the refining environment could lead to higher earnings for the companies, which are well-positioned to take advantage of better cracks and sweet-sour spreads.

However, most analysts rate ExxonMobil as a “hold.” They want to see if higher production and better refining conditions impact the company’s earnings.

Read Why Analysts Prefer Chevron over ExxonMobil? to learn more.