Dividend Aristocrats in Focus Part 5: Exxon Mobil Corporation (XOM)

Business Overview

The reason why the Rockefellers were so successful was their laser-like focus on keeping costs low and innovative drilling techniques, to separate themselves from the competition.

This strategy allowed them to steadily gain market share. The current ExxonMobil keeps the same tactics today. This is why ExxonMobil routinely generates industry-leading returns on capital and has the best balance sheet in the industry.

For example, even though the huge decline in commodity prices over the past two years has caused many oil and gas companies to incur steep operating losses, ExxonMobil remained profitable last year.

It still earned $16.2 billion in net profit for 2015, thanks to its cost-cutting efforts. ExxonMobil cut capital spending last year by $7.5 billion. These efforts helped the company generate an 8% return on capital employed last year, solidly above its peer group.

Unfortunately, conditions have not improved much over the course of 2016…

ExxonMobil’s earnings-per-share declined 62% over the first six months, compared with the same period in 2015. The biggest area of weakness for ExxonMobil is its upstream operating segment, which is composed of its exploration and production activities.

Upstream is the side of the business that is mostly highly exposed to commodity prices, which is why ExxonMobil’s upstream profits collapsed by 86% last quarter, year over year.

Source: ExxonMobil Second Quarter 2016 Earnings Presentation, Slide 9

Still, ExxonMobil earned $3.5 billion in profit over the first half of the year, again due mostly to cost cuts. ExxonMobil slashed its capital spending by 36% in that time, and also suspended its stock buybacks.

The good news is that ExxonMobil has a large portfolio of high-quality assets and several major projects set to ramp up over the next year, which will help improve its returns on capital, and allow the company to capitalize on any recovery in commodity prices.