Continue to prefer higher-beta alternatives Goldman Sachs July 27, 2007
What's changed
Exxon Mobil reported 2Q 2007 EPS of $1.83, below both the $1.96 First Call consensus expectation and our $2.00 forecast. Lower-than-expected E&P earnings was the key variance with our estimates, with E&P production 2% below our estimate and costs apparently higher than we forecast. We do not consider the shortfall to be material, as quarterly volatility is inherent to the sector and Exxon Mobil. We have updated our 2007-2010 EPS estimates for Exxon Mobil. Our new estimates are as follows: $1.80 ($1.85 before) for 3Q 2007E, $1.88 ($1.80) for 4Q 2007E, $7.12 ($7.26) for full-year 2007E, $7.10 ($7.20) for 2008E $7.55 ($7.60) for 2009E, and $4.55 ($4.60) for 2010 normalized.
Implications
Although Exxon shares fell a particularly sharp 4.9% on July 26, the S&P 500 was down 2.3% and Exxon had previously rallied sharply over the past month. There is no change to our fundamentally favorable long-term view of Exxon Mobil. Our Neutral rating on Exxon’s shares reflects our preference to own higher beta alternatives given our bullish crude oil and refining outlook.
Valuation
Exxon Mobil shares have 4% downside to our unchanged $83, 12-month target price, which is based on P/E and cash flow valuation analyses.
Key risks
The key risk for Exxon Mobil shares is a sharp decline in the broader market indices like the S&P 500 and in the short-term a sustained decline in commodity prices. |
