Shares of energy giant Exxon Mobil (NYSE 🙂 have fallen rapidly this year, and not just because of recent random market sales. With the price of a downward spiral, the fate of oil supplies is closely linked to the wider economy, which began to collapse following the global coronavirus outbreak.
As damage to economic growth increased after the closure of businesses and the closing of the population, the demand for oil dried up. By mid-March, Exxon Mobil's inventory had crumbled, shedding around 60%, and reached its lowest level in 23 years.
That massive slump forced the largest gas and oil producer in the United States to freeze its quarterly dividend at its current level for the first time in 13 years and to completely halt share buybacks. In addition, the Irving, Texas-based company announced its first in decades, plus management cut the company's capex budget for 2020 by 30% to $ 23 billion.
Those drastic steps have raised questions about whether Exxon, one of the most reliable income stocks in the US, can save its wholesome dividend – which currently yields 7.92% for an annual distribution of $ 3.48 – even after suspension of benefits. That concern has intensified after many large oil companies cut their payouts in the recent earnings season as they struggle to keep money.
Royal Dutch Shell (NYSE 🙂 lowered its dividend for the first time since World War II and decreased it by 66% to $ 0.16 per share. Oilfield service provider Schlumberger (NYSE 🙂 cut its dividend by 75%, the first cut in about four decades or so.
Meanwhile, another oil and gas service company, Halliburton (NYSE 🙂 stopped cutting, but also made it clear that it would have no trouble doing so if needed.
Review of downgrades
On March 16, S&P lowered Exxon's credit rating from AA + to AA and said it could happen again "if the company not taking enough steps to improve cash flows and leverage & # 39 ;.
To cover its $ 14.7 billion dividend payout this year – the third highest among the S&P 500 companies – Exxon needed crude oil to raise about $ 77 a barrel. This is the highest break-even among oil majors, according to RBC Capital Markets.
Meanwhile, the company's debt has increased from basically zero to $ 50 billion, and last year's earnings were just over half a decade ago. In this highly challenging environment, Exxon management appears to be teaming up due to the company's historically strong commitment to rewarding its investors. According to CEO Darren Woods, one reason to defend the dividend is the fact that 70% of the shareholding consists of private and long-term investors who rely on these checks.
The latest trend in the oil markets suggests that Exxon may have passed the worst of this crisis as demand for oil slowly begins to increase as countries reopen, industrial production revives and cars return on the road.
According to a recent report, China's oil demand is almost back to the level last seen before Beijing imposed a national shutdown to fight the first coronavirus outbreak. Given that China is the second largest oil consumer in the world, behind only the United States, the country's rapid turnaround has contributed to a tightening of the oil market earlier than expected.
West Texas Intermediate crude, which plunged into negative prices a month ago, rose above $ 33 a barrel on Wednesday. The rebound also saw Exxon Mobil shares gain, trading more than 40% higher from their March low of around $ 31. Exxon's rich dividend yield still signals to investors that this oil company will break the trend and do everything to protect its dividend against any reductions.
Bottom Line
In our opinion, Exxon will continue to borrow to finance its dividend. With interest rates at record depths and banks looking to borrow, the energy giant has more incentives to use borrowed money to return cash, especially when it has already drastically cut its spending plans.
That said, Exxon does not make a compelling investment case against other opportunities in the energy space in the long run. Among industry peers, the company is most exposed to negative headwinds, including an oversupply of oil and liquefied natural gas. That situation is unlikely to change as the energy industry goes through a seismic shift.
