During this global health crisis, America's two largest energy companies, Exxon Mobil (NYSE 🙂 and Chevron (NYSE :), have so far avoided declining their coveted dividends. But that can change quickly, given the latest earnings from the companies.
Both oil giants surprised investors last Friday when they released their Q2 2020 earnings reports, showing how much damage each company has suffered as a result of the recent pandemic energy demand collapse. In the, Chevron lost $ 8.3 billion, the biggest loss since about 1998. That display was also in sharp contrast to the same period last year, when the company posted a $ 4.3 billion profit.
Last quarter's losses increased as the producer depreciated $ 5.7 billion in oil and gas assets, including $ 2.6 billion in holdings in Venezuela.
Exxon had an equally disturbing story to tell. The largest US-based oil and gas producer recorded a quarterly loss for the first time this century. The Irving, Texas-based energy supplier reported a deficit of $ 1.1 billion, compared with a profit of $ 3.1 billion in the same period a year ago.
Exxon also told investors that it will postpone its ambitious expansion plan to save money. The company failed to generate positive operating cash flow in the quarter.
The stock prices of both companies indicate that investors do not have much hope of a quick reversal of their fortunes for both companies, now that the pandemic is still raging. It is also not clear how long it takes consumers to resume normal activities. Exxon shares, which closed at $ 43.47 on Tuesday, have fallen more than 35% this year, while Chevron lost 30% at $ 86.49 in the same period.
If this situation lingers, the next big question is: how long can these giants continue to receive hefty dividend payments, especially if they don't generate positive cash flows?
Exxon's return in excess of 8% clearly indicates that investors see a high risk of a future downgrade. The situation is quite precarious for the largest US producer, which so far had no intention of cutting its dividend.
If the company sticks to its plan to save the current payout percentage for this year's balance, it means they need to free up about $ 15 billion, while the balance looks bad and borrows a lot.
Although Exxon generated no operating cash flows in the second quarter, it paid $ 3.7 billion in dividends, increasing its net debt by $ 8.8 billion during this period. If Exxon and Chevron decide to cut their payoffs, they can retest if the world sees new demand fall, or if the alliance to control the supply of OPEC + producers falters.
Indeed, OPEC + started pumping more after production cuts that supported prices around $ 40 a barrel during the early stages of the pandemic. According to a report in Bloomberg, the group and its partners will release an additional 1.5 million barrels per day in August in August compared to July.
In addition to the short-term headwind that is harming the oil industry, the transition from fossil fuels continues to threaten the long-term prospects of the industry – and it is not going away. The global trend is to increase dependence on low-carbon fuels, such as gas or alternative energy sources. The pandemic further accelerated that shift.
As a result of this pressure and poor price outlook, Chevron, Royal Dutch Shell (NYSE 🙂 and BP (NYSE 🙂 all depreciated billions of dollars in assets in the past quarter. Maybe Exxon will do the same soon.
Bottom Line
In our opinion, oil stocks are not a convincing investment case in today's economic environment. These companies are exposed to negative headwinds, including an oversupply of oil and liquefied natural gas. That situation is unlikely to change as long as the pandemic continues to accelerate and sentiment moves away from fossil fuels.
