There is no way to sweeten it: oil giant ExxonMobil (NYSE: XOM) has had a very, very bad year Shares fell more than 35% so far this year.
Of course, the past few years haven’t been that good for the company, either: ExxonMobil shares have lost more than 45% of their value in the past three years. In fact, ExxonMobil’s shares have not been so low since 2004.
Is it time to buy?
Image source: Getty Images.
Oil or agitation
To be fair, ExxonMobil is not the only oil company to have suffered damage in 2020. Almost every company in the industry suffered a major blow in early March after an oil price war broke out between Saudi Arabia and Russia, reducing crude prices practically in the middle. When the coronavirus pandemic exploded in mid-March, demand for fuel dried up, leaving the world flooded with cheap oil that no one was using.
Since then, oil prices have recovered somewhat. The Brent Crude International Benchmark and the US WTI Crude Benchmark have held above $ 40 / barrel for most of July. That is still a long way from the January high of over $ 60 / barrel, but things are moving in the right direction, at least.
ExxonMobil can profitably pump oil from some of its fields at these prices. For example, your massive offshore growth game in Guyana should be able to make a profit of $ 40 / barrel Brent Crude. However, other parts of your portfolio are not as viable. The company has not released an official number, but some analysts believe ExxonMobil may need oil prices as high as $ 75 / barrel to break even.
Considering that oil prices have only briefly exceeded that level once in the past five years (mid-2018), ExxonMobil may not be targeting profitability anytime soon.
Win or burn
Low oil prices may continue for months, if not years. Can Exxon?
In short: yes, probably.
ExxonMobil has cut $ 10 billion, about 30%, from its 2020 capital budget and has also made an additional 15% cut to its operating expenses. Those moves, along with the size of the company, which remains the world’s largest oil company by market cap, at $ 184.5 billion, should be enough to ensure it can weather the current economic downturn without sinking.
Of course, “not falling” is very different from “overcoming”. It is difficult to see how ExxonMobil, or any oil company, can prosper in a world where there is an oversupply of oil. Even with the significant OPEC + production cuts agreed in April, crude prices are not close to the levels necessary to ensure continued profitability. And those OPEC + production levels are subject to change at virtually any time.
However, there is another potential argument for buying ExxonMobil. He is a dividend aristocrat who has increased his payments every year for the past 37 years. With a current return of around 8%, the company could be a good choice for dividend investors … if that return is sustained.
Pay or stay out
ExxonMobil’s dividend currently costs the company around $ 15 billion per year. Meanwhile, his free cash flow has plummeted in the past year, to just around $ 2.5 billion. That, combined with the company’s current $ 11.4 billion cash accumulation, wouldn’t even cover a year of dividend payments. That leaves taking on additional debt as one of the only ways to finance the dividend.
Peer oil major Royal dutch shell bit the bullet and cut its dividend in April, but there are signs that ExxonMobil is not going to take that route. Its aforementioned size and balance sheet, strengthened by years of conservative fiscal management, have put it in a position to increase debt under favorable conditions. In fact, despite the recent downgrades of S&P Global and Moody’sExxonMobil’s debt still has a high rating, at Aa1 / AA. Its current long-term debt load of $ 59.6 billion is only 1.3 times earnings before interest, taxes, depreciation and amortization (EBITDA), one of the largest oil companies, so it has room for maneuver on its balance sheet. .
However, the biggest sign that ExxonMobil is not going to jeopardize its Dividend Aristocrat status by reducing its payout came from CEO Darren Woods in the first quarter 2020 earnings call. “[I]If you look at our shareholder base, about 70% of them are retail or long-term investors looking for our dividend and seeing it as a major source of income stability, “he said.” And we have a strong commitment to that. “
Translation: ExxonMobil is not likely to cut its dividend … but that does not guarantee it will not if oil markets deteriorate rapidly.
Buy or bye
It is difficult to call ExxonMobil a purchase at this time. The company is underperforming in the long term in a volatile industry facing unprecedented challenges. It is not really clear how the company could return to consistently outperform anytime soon.
ExxonMobil’s dividend is less risky than many other oil reserves, “and its return is much higher than that of many other dividend aristocrats.” Oil prices appear to have stabilized, for now, to the point that an imminent dividend cut is unlikely. Dividend investors who have a moderate tolerance for risk may consider buying for that reason. However, most investors will find better opportunities elsewhere in the energy sector.
