Although I only covered Exxon (XOM) last week, I feel like I should give it another article after Friday’s results. Suffice to say that they were pretty poor. Macro conditions came in way below the company’s reference points, leading to a $6b decrease in annual profit versus 2018. In fact, if you strip out some one-time items, such as the gain booked on the sale of non-operated upstream assets in Norway, then profit was down circa $10b versus 2018.
In terms of annual cash flow, the company generated approximately $28.8b over the course of 2019. That figure excludes cash from asset sales and working capital movements. The combined bill covering cash capital expenditures and shareholder dividends clocked in at circa $41b over the same period. Absent cash from other sources, quick math would suggest the dividend is now in unsustainable territory.
Two other issues are proving an acute problem right now. Firstly, coronavirus is wreaking short-term havoc on the oil price – hardly surprising given China consumes over 13m barrels each day. Secondly, Exxon is heading into a massive capital spending program that will swallow up to $35b in cash this year. For those reasons, the stock is currently getting pummeled. Heck, it’s even down another 2.4% as I type.
Under company reference conditions, Exxon would be on course to make well over $20b in net profit this year. I reckon that works out to over $45b in terms of cash flow, with that figure assuming annual depreciation runs at around $20b. Even under the company’s aggressive capital spending program, with $35b planned for this year, that would be enough to cover most of its dividend obligations for 2020. The assumption these numbers were based on included a real terms Brent crude oil price of $60/bbl (2017 reference) and 2017 margins in Chemicals and Downstream.
Herein lies the big problem for Exxon right now. Firstly, that $60/bbl reference price is more like $65/bbl right now due to the effects of inflation. Obviously that is some way above the prevailing price – currently $54.20/bbl for Brent at time of writing and circa $49.95/bbl for West Texas Intermediate. As far as media commentary goes, this is typically what garners most attention.
Although this isn’t all that surprising – after all, Exxon generates most its earnings from upstream activities – it is worth considering how poor the Downstream and Chemicals numbers are. Margins here are basically at ten-year lows. In terms of the overall combined numbers, those two segments made around $6.45b less last year than back in 2018. That is the equivalent of around 40% of Exxon’s total annual cash dividend bill.
A small sticking sticking plaster is coming in the form of the company’s divestment program. By 2025, Exxon plans to raise around $25b in total from the sale of non-core assets. Around 60% of that is due to come in the 2019-2021 period. Exxon booked circa $4.8b last year, around 75% of which it has already received in hard cash. Quick math therefore suggests that around $11b is due over 2020 and 2021.
If you’re somebody who is concerned about the sustainability of Exxon’s dividend, that should provide a little bit of comfort. I mean, as a result of its capital spending plans the company reckons it will be generating $40b in post-2021 annual cash flow under a $40/bbl oil price scenario (real terms, 2017 prices). That is still some way below current levels. In the high-$50s/bbl range, the company will throw off enough cash to cover its dividend – even with capital spending running at around $30b per annum.
This is obviously all still a couple of years away. In the meantime, it looks like Exxon is set for a dividend squeeze. Or put another way, it will have to cover its dividend with asset sales and more debt. Share repurchases look totally off the table for the foreseeable future. In exchange for that level of uncertainty, the stock currently offers a historically high dividend yield that is in excess of 5.6%. I maintain the view that this will look a good bargain in a few years time, at which point the company could realistically be pumping out $10b-plus in post-dividend annual free cash flow.
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