Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Exxon Mobil Corp.'s problem isn't that it missed earnings forecasts (though, even with a profit of $3.4 billion, it did). And its problem isn't that it missed production forecasts (which also happened). It isn't even that its U.S. upstream business clocked its tenth quarterly loss in a row (actually, that one is a problem, but not the main one).

Exxon's problem is that all this makes it just too expensive.

The only thing that really matters when it comes to the supermajors right now is how much cash they're generating. Exxon noted toward the top of Friday morning's results announcement that cash from operations covered its capital expenditure and dividends -- which is the bare minimum investors want to see with oil still hovering at around $50 a barrel.

But, it should be noted, this is partly because capex has been dialed way back. While many oil and gas producers are tapping the brakes these days, Exxon of course does things a bit bigger. Capex and exploration spending fell 24 percent in the second quarter, year over year, and totaled $8.1 billion versus a "flexible" full-year capex budget of $22 billion.

Nothing terribly wrong with that; it's good to be flexible when you're relying on fickle things like oil prices and refining margins for revenue.

The problem is that Exxon's performance is looking ever less impressive relative to its peers these days.

The day before, arch-rival Royal Dutch Shell Plc delivered thumping results. Its free cash flow -- after both capex and dividends -- was $1.9 billion. Even if the dividend currently being paid via issuing shares were done with cash, Shell's excess cash would have been $1 billion. Add in proceeds from disposals, which is the figure Exxon prefers to report, and Shell's free cash flow after capex and dividends was almost $7.5 billion.

Exxon's free cash flow, meanwhile, was around $800 million.

Here's how things look over time:

Shell For Leather
On a trailing 4-quarter basis, Shell's free cash flow after capex and dividends has accelerated past Exxon
Source: Bloomberg, the companies
Note: Assumes free cash flow for Exxon in 2Q2017 of $800 million.

It would be fair to observe that Shell's recent acceleration comes after a deeper downturn in its free cash flow, and so Exxon's stability deserves a premium.

But Shell has now delivered four quarters of excess cash in a row versus Exxon's three. And the outlook shows a stark difference. Analysts forecast Shell to generate free cash flow (before dividends) of around $60 billion over the next three years, according to consensus figures compiled by Bloomberg. That is almost double the figure for Exxon.

And yet, on virtually any measure of value, Exxon still trades at a huge premium to Shell:

Premium Fuel
Despite being forecast to generate much less free cash flow than Shell over the next several years, Exxon is valued at a big premium to its big rival
Source: Bloomberg
Note: Valuation multiples reflect consensus estimates for 2017.

Exxon has clearly been struggling amid this downturn, as the loss of its triple-A credit rating and a rare write-down attest. Moreover, Exxon is undergoing a big shift in its strategy, as its bet on Russia remains in sanctions limbo and it attempts to apply its historic returns-focused approach to the highly capital-intensive shale business (remember those 10 quarters of U.S. upstream losses?)

Exxon's long track record of operating excellence isn't to be dismissed lightly. But it is getting ever harder to justify forward-looking multiples based on historical achievements.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at

To contact the editor responsible for this story:
Mark Gongloff at