Exxon Mobil Corp. (XOM): 1Q 2008 shortfall could help COP and CVX narrow valuation gap - Goldman Sachs - May 02, 2008
What's changed
ExxonMobil reported 1Q2008 EPS of $2.03, below our $2.12 forecast and the First Call consensus estimate of $2.14. The variance versus us was driven by a combination of lower international E&P and international R&M earnings than we had been forecasting. Total E&P production of 4,182 MBOE/d came in well below our 4,383 estimate, with the most notable shortfalls in Africa and Europe oil and Asia Pacific/Middle East gas.
Implications
While production sharing contract (and related) effects accounted for a portion of the shortfall, E&P volumes still seemed light. We believe there is downside risk to our current expectation of flat longer-term volume growth, which may keep the shares from outperforming the sector in a bullish crude oil price environment. We continue to believe that Exxon’s superior returns will result in meaningful outperformance versus the sector should oil prices sustainably turn down, though we do not think this is imminent. We also believe management should be applauded for avoiding “feel good” strategies like biofuels, but where long-term benefits to shareholders and the environment are highly questionable. We would not view positively Exxon meaningfully increasing its exposure to “alternative energy,” simply to appease critics.
Valuation
Similar to those of other integrated oils, Exxon shares do not look expensive relative to both the broader stock market and to oil prices, though we currently prefer the risk/reward of both ConocoPhillips (CL Buy) and Chevron (Buy). We think Exxon’s 1Q 2008 EPS shortfall could convince investors to narrow (but not close) COP and CVX’s valuation gap with it. We see 21% upside to our unchanged, $107 12-month target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower commodity prices. |
