Here’s Why Analysts Expect Record-High Earnings For ExxonMobil

Surging prices for plastics are likely to help Exxon's petrochemicals division post record-high earnings this week when the company reports its earnings.

Items like flooring, roofing and packaging all saw demand remain firm throughout the pandemic. This helped keep a bid under the price of the commodity while the "lockdown trade" pulled the rug out from under the bid of other items, like vacations and corporate real estate. Chemical ingredients like polyethylene and polyvinyl chloride used to make plastics have seen record-high prices this year. Limited supply and bottlenecked shipping are adding to the price momentum. 

Expectations for Exxon's upcoming earnings report are that the company will show "a radical financial transformation from last year," according to Bloomberg this week. With higher oil prices as an obvious tailwind, the supermajor is expected to have generated enough cash to pay its dividend for a second straight quarter, moving away from the habit of borrowing to fund the distribution.

Morgan Stanley has even said that the company has its "best dividend coverage in a decade".  

Matt Murphy, an analyst at Tudor, Pickering, Holt & Co. told Bloomberg: “Chemicals has certainly been a noteworthy area of continued improvement for the majors and Exxon in particular. It’s an area that hasn’t tended to get a ton of focus in the past, but it’s providing strong support for free cash flow across the group.”

Bloomberg analysts estimate Exxon's chemicals segment brought in about $1.94 billion in Q2. 

Shell and Chevron should also see a rise in profit as a result of the rising prices, Bloomberg notes, but Exxon stands out from the group as the "biggest winner" thanks to the large size of its chemicals division. Exxon currently has chemical facilities on the U.S. Gulf Coast, in Rotterdam, and in Singapore. It is currently expanding into Texas and China. 

Zachary Moore, a market analyst for data provider ICIS, said: “Strong earnings should continue for the remainder of this year. Changes in consumer behavior such as more online shopping and at-home dining may make a permanent jump of around 2-3% in overall demand for polyethylene packaging.”

Paul Cheng, an analyst at Scotiabank, added: “This quarter will have gangbuster chemical earnings, but it probably marked the peak and will come off in subsequent quarters.” Cheng attributes his predictions for a peak, followed by a pullback, to supply chains loosening up and facilities recovering from outages. 

Earnings are also expected to be helped along by cuts in spending put into place by Exxon Chief Executive Officer Darren Woods, who aims to scale back growth spending by $10 billion per year, out to 2025. The cuts have allowed Exxon "to harvest large cash flows from this year’s higher oil and gas prices," the report says. 

Exxon is set to report earnings on Friday. In Q1, the company's chemical segment reported its highest profit in almost a decade.