Exxon Mobil (XOM) stockholders have been put through the wringer in recent years. COVID and 2020 speak for themselves, but the stock largely went sideways in the years before the pandemic too. Those years include two oil price crashes and a massive bull market in equities, but we can forget the bull market here and just call it an absolutely wretched era for Exxon stock. Still, big oil price slumps typically represent the best time to buy, and the stock is now up circa 60% on its COVID-induced low point, excluding dividends. It is also up around 16% since it last featured back in August, again excluding dividends. Brent crude is up roughly 40% over the same period.
The firm released pretty horrid looking numbers in its Q4 2020 results last week, so let’s deal with that first. The headline quarterly loss clocked in at $20b – the bulk of which came from non-cash impairment charges to its US upstream assets. That, in turn, brought the 2020 loss to circa $22b. Turning to cash flow, Exxon generated $4b in Q4 and just under $14.7b for FY20 as a whole. Suffice to say that nowhere near covered capital expenditures and the dividend, but more on that later.
Those numbers clearly look awful for the firm. Of course, 2020 saw not just an oil price slump, but terrible downstream conditions too. Brent crude averaged around $41.75 per barrel in 2020, down from over $64 per barrel in 2019. Combined with lower production, that saw segmental Upstream earnings collapse, even after excluding impairment charges. Downstream earnings likewise tanked as the demand-crash in finished products hit margins. Downstream posted a $1b loss last year, down from a $2.3b profit in 2019, albeit including identified items of circa $850m. That segment also remained under pressure in Q4, even as higher oil and gas prices lifted underlying Upstream earnings.
Pre-COVID, Exxon had committed to a fairly meaty period of higher capital spending as it brought on a number of new projects across its business. The CapEx bill was set to clock in at circa $35b last year, then average in the $30-$35b per year range out to 2025. It also spent over $30b on CapEx in the year before the pandemic. Combined with the $14.9b annual dividend, that saw net financial debt increase noticeably. It came in at circa $44b at the end of 2019, up from circa $35b at the end of 2018.
What a difference a year makes. The CapEx bill unsurprisingly saw large cuts, to a total of $21b, while the board opted to defend the dividend. Relatively meagre cash flow due to horrid operating conditions resulted in a $20b-plus free cash flow hole. Asset sales filled that a tiny bit, but mostly it came down to more debt. The firm did at least manage to raise that at cheap interest rates thanks to the actions of central banks. You may also recall that management promised no more debt after Q2 results, and that did prove the case, with gross debt remaining in the high-$60b region. Net debt stood at roughly $63b at the end of 2020.
Furthermore, that $30-$35b in planned future annual CapEx also saw the axe. The company now plans circa $16-$19b in 2021 CapEx, with that followed by $20-$25b in annual CapEx out to 2025. Exxon sees those projects driving circa 40% of cash flow by then. The company also expects to generate a 10% underlying return on its Upstream projects at $40 Brent.
The above looks like good news for the dividend. Those willing to take the risk of a cut were treated to yields in excess of 11% at its highest. Higher oil prices and the subsequent share price rally bring that down to its current level of 6.9% – with that figure based on a current share price of $50.52 and a quarterly dividend of $0.87 per share.
The rally notwithstanding, that still looks quite attractive. Having slashed operating and capital expenditure, Exxon expects the dividend to be covered at circa $50 Brent this year, and possibly lower depending on CapEx. Weak downstream conditions put a question mark on that, but Brent trades above $62.50 per barrel at time of writing.
Looking slightly further ahead, the Brent-breakeven remains at circa $50 per barrel out to 2025, though that does incorporate a $6b increase to the annual CapEx budget. Capital spending at the lower-end of management guidance reduces the breakeven to circa $45 per barrel. Note that surplus cash flow arising from above-reference operating conditions will support the balance sheet as a priority, which probably means weak dividend growth going forward. Note also that these figures include planned divestment proceeds of circa $3b per year between 2020 and 2025. That represents a downgrade on the original $25b divestment program covering the 2019-2025 period.
Still, the above puts the current dividend on much more stable ground, at least over the medium term. The big winners are those that bought in the meltdown – a quick number crunch suggesting mid-teens annual returns for those bargain hunters, assuming stable dividends and the prevailing stock price. The current price is hardly expensive though, and it remains down circa 25% on pre-COVID levels. A 6.9% dividend yield, with much greater clarity attached, may also appeal to yield hunters.
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