ExxonMobil's Profits Are About to Fall. Is the Oil Stock Still a Buy?

ExxonMobil (NYSE: XOM) recently gave investors a sneak peek into its upcoming third-quarter earnings report. The oil giant issued a muted outlook, expecting its profit to fall. The main culprit was oil prices, which slumped 17% in the period.

While ExxonMobil expects to report lower profits in the third quarter, the oil company is likely to deliver peer-leading results again. That's one of the many factors that make it look like an attractive oil stock to buy these days.

The undisputed leader

Exxon produced a prodigious profit in the second quarter. It delivered an industry-leading $9.2 billion of earnings. That was nearly double Chevron's total and more than triple the profits of big oil rivals BP and ConocoPhillips. Exxon benefited from its efforts to fundamentally improve its earnings power, which included closing its needle-moving acquisition of Pioneer Natural Resources.

Its robust profit also enabled it to deliver peer-leading cash returns to shareholders in the period. Exxon paid $4.3 billion of dividends, the second highest in the S&P 500. It also repurchased $5.2 billion worth of its shares, which led its peers. Even with those strong cash returns, Exxon ended the quarter with the strongest balance sheet in the oil patch, backed by a low 6% leverage ratio.

Still strong despite some headwinds

ExxonMobil doesn't expect its third-quarter results to be nearly as robust. In a recent regulatory filing, Exxon unveiled that its upstream earnings in the period would be about $600 million to $1 billion lower than the second quarter, when it produced $7.1 billion of earnings, because of weaker oil prices in the period. Brent crude, the global oil price benchmark, tumbled 17% in the quarter, closing below $72 per barrel.

The oil company also expects to deliver lower earnings in its refining segment. Weaker refining margin in the period will probably reduce the profitability of its energy products segment, where it recorded $946 million of earnings in the second quarter, by up to $1 billion. Refining markets have been under pressure from weaker consumer and industrial demand because of slowing economic growth in China and an acceleration of electric-vehicle usage.

A potential temporary speedbump

While Exxon anticipates that its profits will decline by as much as $2 billion in the third quarter, its earnings could bounce back in the fourth quarter. Crude prices have already rallied sharply over the first few days of the quarter. Brent rebounded nearly 10% last week, closing above $78 a barrel. Crude oil prices have surged because of a potential escalation of the conflict in the Middle East.

Oil prices could continue to spike, especially if Israel launches a direct attack on Iran's oil infrastructure. That could trigger further escalation, with the potential for Iran to retaliate against other oil infrastructure in the Middle East. One analyst has speculated that oil prices could skyrocket to more than $200 a barrel in a worst-case scenario.

However, Exxon doesn't need oil prices to surge in order to thrive. The company is building its business to become more profitable at lower oil prices. It's investing heavily in expanding its highest-margin assets, including Guyana, the Permian Basin, Brazil, and LNG. Exxon recently closed its $60 billion megadeal for Pioneer Natural Resources to accelerate its growth in the Permian. Meanwhile, it's seeking to capitalize on Chevron's attempt to acquire Hess to potentially seize the opportunity to boost its position in Guyana. This strategy will grow Exxon's production from its advantaged assets to more than 60% of its output by 2027, up from 43% last year. That would boost the earnings power of its upstream business at $60 Brent oil from $9 billion to $13 billion.

Meanwhile, Exxon is also working to increase its product solutions business' earnings capacity while reducing structural costs. It's investing heavily to expand product production capacity, which it expects will grow from 13.8 million tons per year in 2023 to over 20 million tons annually by 2027. That should boost the earnings capacity of its products solutions segment from $1.3 billion to $4.7 billion. In addition, Exxon is working to reduce its structural costs by another $5 billion by 2027 from last year's level.

Built to thrive

Exxon is likely to report lower third-quarter earnings. However, it's starting from a strong point and likely made a lot more money than its peers in the period. Meanwhile, Exxon is in an excellent position to post higher earnings in the future. Rising crude prices could boost its earnings in the fourth quarter, while investments to grow its high-margin upstream and products solutions businesses, along with cost reductions, should bolster its future earnings capacity. Add it all up, and Exxon is a great all-weather oil stock to buy and hold.

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Matt DiLallo has positions in Chevron and ConocoPhillips. The Motley Fool has positions in and recommends BP and Chevron. The Motley Fool has a disclosure policy.