ExxonMobil (XOM) CEO Rex Tillerson was brutally honest about the near-term results of Exxon’s decision to add exposure to natural gas with its purchase of XTO Energy: “We are all losing our shirts today,” he said in June. “We’re making no money. It’s all in the red.”
Indeed, the company’s increasing reliance on natural gas has brought its profitability down, writes Deutsche Bank analyst Paul Sankey in downgrading the shares to Hold.
“That damaging exposure has cost ExxonMobil its leadership in per barrel profitability, taken by Chevron, where we expect the least quarterly results drama of all,” Sankey writes.
Exxon is in a weak position heading into its quarterly results, says Sankey.
“As regards the quarter, the issue with ExxonMobil is indeed the drag of US natgas, and the extent to which booming refining and marketing margins offset this. Related directly to the surprise on unconventional oil, it is a logical extension that ExxonMobil grossly under-estimated the impact on refining, particularly on the profitability of light-sweet US refiners vs heavy-sour complex coking units. In short, they are not ideally suited for the environment.”
Instead, Sankey prefers Occidental Petroleum (OXY) and Chevron (CVX).
“In a sector that has aggressively de-rated because investors hate drama, Chevron is our top pick alongside Oxy, where solid volumes will generate a solid result, in our view, even if once again the Phibro trading operation exacerbates the negative impact of the down move in oil prices.”
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