Exxon (XOM) reported a sharp decline in fourth-quarter earnings relative to a year earlier as it recorded a rare impairment charge on its upstream assets. Earnings fell to $1.7 billion from $2.8 billion the year before, primarily because of a decline in upstream earnings resulting from the $2.0 billion impairment charge related to dry gas operations in the Rocky Mountain region. Without the impairment charge, upstream earnings actually improved from the prior year on a mix of higher commodity prices and lower operating expenses. Production for the quarter fell 3% to 4.1 million barrels of oil equivalent from 4.2 mmboe a year earlier, but finished the full year down only 1%, with declines in natural gas production offsetting slight gains in liquids production. As previously guided, production volumes should remain flat through 2020. However, Exxon will continue to add new volumes to its portfolio from new project startups that might not result in overall volume growth, but will deliver margin improvement over the next two years. Further, it estimates that its recent Permian acquisition could ultimately produce 350,000 barrels per day and bolster unconventional production to 20%-25% of liquids production from 12% currently. We expect greater detail on Exxon’s production growth outlook next month during its annual analyst day. Until then, we retain our fair value estimate and moat rating.
Exxon generated sufficient cash flow during the quarter, including asset-sale proceeds, to cover capital spending and the dividend and repay debt. For the full year, Exxon ran a free cash flow deficit after the dividend, but also had large working-capital requirements, deferred tax impacts, and a pension contribution, which reduced cash flow by $8 billion but are unlikely to persist. While capital spending is set to increase to $22 billion in 2017 due to increased activity from the recent Permian acquisition, we expect Exxon to generate sufficient free cash flow to cover the dividend.
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