When Less Is Less
October 30 2020 - 1:55PM
Dow Jones News
By Jinjoo Lee
Exxon Mobil clearly wants to keep investors pleased with its
consistent dividend payout, but management may no longer be reading
the room correctly.
The company reported better-than-expected revenue and a net loss
that was 37% smaller than the previous quarter, helped by higher
oil prices. Refining margins hit record lows. Although demand for
road transportation fuels has improved, Exxon produces excess jet
fuel that it has been forced to blend into other products at great
expense.
The good news is that free cash flow, while still negative,
improved. That arguably helps Exxon justify its continued dividend
payout, which the company said it intends to preserve in 2021.
Despite that pledge, Exxon shares aren't faring much better
year-to-date than international rivals that have slashed their
payouts.
What is clear is that Exxon will keep bleeding cash at current
oil prices. Its operating cash flow can't cover outlays needed to
maintain the business and to cover dividends. In fact, Exxon needs
West Texas Intermediate prices to be at roughly $50 a barrel for it
to manage its payout and maintenance-level capital expenditures
from operating cash flow, according to Pavel Molchanov, equity
analyst at Raymond James.
Rob Thummel, investment strategist at TortoiseEcofin, figures
that number is even higher -- between $50 and $60 a barrel. WTI
crude is around $35 a barrel and is only expected to average more
than $50 by next year's fourth quarter, according to a group of
investment banks polled by The Wall Street Journal in early
October.
Until then, Exxon needs to cover the hole through more capital
expenditure cuts, raising net debt or selling assets. Mr. Molchanov
notes that capital spending is already close to maintenance levels.
Simple upkeep in such a complex, sprawling business is expensive.
Exxon is still a double A-rated issuer and can still borrow at
attractive rates, but reiterated on Friday that it doesn't plan to
raise more debt. At its current burn rate, analysts expect Exxon's
cash balance to hit $667 million in a year. In the last 10 years,
Exxon has never had less than $3 billion of cash on its balance
sheet.
The company said it is in advanced discussions on several
potential divestments. In addition to its previously announced $15
billion target, it is also assessing the sale of North American dry
gas assets that have a combined carrying value of up to $30
billion.
Exxon expresses confidence in fossil fuels' long run promise
even as competitors plan their exits, and its case isn't
unconvincing. Investors are making the same bet. If they are right,
though, then the sacrifices management is considering to preserve
its dividend risk leaving a lot of money on the table.
(END) Dow Jones Newswires
October 30, 2020 13:40 ET (17:40 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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