UBS AG (USA) (NYSE:UBS) downgraded Exxon Mobil Corporation (NYSE:XOM) shares to “Neutral” from “Buy” today. The main reasons given by UBS for downgrade relate to “disappointing” production trends, using asset sales to boost earnings. Other reasons for the downgrade include low earning quality due to asset sales, and risk of slowing the pace of share repurchases from 2012’s $20billion.
The downgrade came just one day after the oil giant reported its second-quarter earnings. The net income for the company rose 49 percent to $15.9 billion, with almost half of it coming from the sale of refining and chemical operations in Japan. Excluding the asset sale, its operating profit was $8.4 billion, which is its lowest since the third quarter of 2010. Exxon’s revenue for the second quarter rose 1.5 percent to $127.4 billion.
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William A. Featherston, an analyst from UBS, said “continued disappointing production trends,” and “earnings quality (was) increasingly polluted by gains on asset sales”, were the main reasons for downgrade. Featherston explained that Exxon Mobil is one of the best managed companies involved in various processes. Exxon along with exploring and producing oil and natural gas, also refines and sells petroleum products. But according to him, management is focusing more on long term growth by tapping unconventional energy, which in short term is risking its return on capital. Focusing on its stock performance, Featherston said that the stock is trading above its 5-year average price-to-earnings ratio, and is greater when compared to other oil companies. The analyst lowered the production growth for Exxon for the year 2012-13, and also reduced the 2012 EPS estimate to $7.69 from $7.87, and 2013 EPS estimate to $7.71 from $7.99.
Exxon Mobil Corporation (NYSE:XOM) is the world’s biggest oil company by market value. It operates petroleum and petrochemicals businesses worldwide. The company deals in exploration and production of oil and natural gas, coal and minerals operations, electric power generation and also manufactures and markets fuels, lubricants, and chemicals.
Even after the downgrade, analysts left the $90 price target for Exxon’s stock unchanged. In midday trading, Exxon Mobil shares added 27 cents to $86.79, which is its highest in 52-week range of $67.03 to $87.94.