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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