As devastating as 2020 was for the world's largest oil producers, the worst may not be over yet. In a legal filing last week, ExxonMobil (NYSE 🙂 said it might get a fourth consecutive time when it reports earnings early next month.
The largest American and gas explorer struggled last year to generate positive cash flows amid a collapse in energy prices, forcing the giant to implement drastic cuts. In a latest statement, the Texas-based company said it plans to put capital expenditures at $ 25 billion a year by 2025 and take a whopping $ 20 billion write-off on North and South American assets.
The unique thing about Exxon is that the company is one of the few energy giants to continue to pay dividends even as the financial situation deteriorated significantly during the global health crisis. But as the pandemic continues, concerns are growing among Exxon investors about the sustainability of its once solid payout policy.
Exxon borrowed a lot of money to support its dividend and cover its capital expenditures. The last time Exxon generated enough free cash to cover its payout was in the third quarter of 2018. These difficulties and uncertainty over its dividend have kept its stock under extreme pressure in 2020.
Exxon Mobil Weekly Chart.
The stock fell about 42% in the past 12 months, increasing the dividend yield to more than 8%. During that time, Exxon reported its first quarterly loss in decades, it was thrown out of jail and attacked by activist investors looking for better returns and more accountability for the climate.
Consistent underperformance
According to a recent Bloomberg report, DE Shaw & Co., which has built a significant position in Exxon, the company is calling for budget cuts to improve performance and dividend.
In a letter to Exxon, D.E. Shaw argued that the oil company has consistently underperformed rival Chevron (NYSE 🙂 and that its current unsustainable path jeopardizes its dividend, the report said, citing sources.
D.E. Shaw believes Exxon's failure to adapt has wiped out more than $ 100 billion in shareholder value over the past five years. It has urged Exxon to reduce capital expenditures to a maintenance level of about $ 13 billion from its planned $ 23 billion this year, and to reduce its operating costs by as much as $ 5 billion.
Exxon pays a $ 0.87 quarterly dividend, which is up about 5% over the past five years. The company spends about $ 15 billion a year to pay these dividends, making Exxon one of the most held stocks in income-generating portfolios.
The main long-term risk to Exxon investors is whether the company will be able to continue to spend this huge amount of cash on payouts while borrowing money to do so. Management's latest signal suggests it could be a difficult preposition unless the oil markets show a strong rebound.
Oil prices have stabilized above $ 50 in recent weeks, aided by the introduction of vaccines to combat COVID-19 and robust fuel economy in Asia. According to the Paris-based International Energy Agency
supply and demand should remain broadly in balance in the first half of the year.
However, this burgeoning recovery in the oil markets may not be enough for Exxon to save its "reliable and growing dividend." In a Nov. 30 statement, while the company announced write-offs and cuts, it only mentioned its commitment to a "reliable" payout, suggesting that there could be no increase in payouts this year.
said Darren Woods, Chairman and CEO, in the statement:
"Recent research success and reductions in the development costs of strategic investments have further increased the value of our leading investment portfolio."
"Continued emphasis on advancing the asset base – through exploration, divestment and prioritizing favored development opportunities – will improve profitability and cash generation and rebuild balance sheet capacity to manage future cycles of commodity prices while efforts are being made to maintain a reliable dividend. ”
Bottom Line
Exxon is, in our opinion, a risky bet among the major oil producers, mainly because of its unsustainable dividend. The stock's current high dividend yield reflects that risk. Investors should avoid these stocks, especially when the economic recovery remains fragile and oil stocks persist.
