There have been some concerns about the production levels of Exxon Mobil (NYSE:XOM), which has caused the investors and analysts to be pessimistic about the stock. However, the growth in dividend and reserve replacement has been impressive for the company. Adequate reserve replacement will allow the company to maintain/increase production levels and enhance its cash flows in the future. As a result, more cash will be available for distribution among its investors. Let's see where the current cash flows and dividends stand and how much room is present for the company to grow its dividends.
Dividend and Cash Flows Analyzed
Exxon Mobil is one of the best dividend payers in the market, and a large number of investors have picked the stock due to the company's ability to pay dividends. As I mentioned above, there have been concerns about the production levels and declining earnings of the company. Exxon Mobil has been growing its quarterly dividend levels at more than 10% each year. The company has been increasing cash dividends for the last 31 years, and at the moment, the quarterly dividend stands at $0.63 per share. Exxon increases its dividend after each year and this was the last dividend for the year. I believe the next dividend will be higher than the $0.63 per share, keeping in mind the history of the company.
At current dividend levels, the company distributed over $10.9 billion to shareholders in the last year through dividends. For the same period, the company generated $12.6 billion free cash flows. As a result, payout ratio for Exxon based on free cash flows is close to 86.5%, while payout ratio based on earnings is close to 33%. If we assume the growth rate (10%) in quarterly dividends remains at the historical levels, then the company will have to pay around $11.9 billion in dividends over the next twelve months, which will bring its payout ratio based on free cash flows close to 95%.
If there is no growth in the operating cash flows, the company will have to cut back on capital expenditures in order to maintain a healthy buffer. Capital expenditures for Exxon have been over $30 billion in each of the last three years. Another way to maintain its payout ratio will be to pay less through share repurchases - Exxon has been paying back close to $20 billion in stock repurchases. In my opinion, the company will continue to increase its dividends regardless of a decrease in operating cash flows - the sheer size of the cash flows will allow the company to manage its payout.
Production Levels and Reserves Replacement
Recently, Exxon Mobil announced a deal with Endeavor Energy Resources to access the Permian shale oil reserves. Exxon has been viewed as being late to the shale oil boom, with a primary focus on shale gas, but there seems to be a slight rebalancing happening from the company. Through this subsidiary, Exxon will gain access to 34,000 acres in the Wolfcamp formations of Midland and Upton counties.
One of the most important factors for the energy companies is the reserve replacement. Exxon has been replacing its reserves at more than its production levels for the past 20 years. For the most recent year, Exxon added 1.2 billion barrels of liquids, which stands at 153% of the production during the last year, and 400 million oil-equivalent barrels of natural gas were added to the reserves, representing reserve replacement of 53% for natural gas. The total reserve replacement was close to 106% of the production levels of the last year. The average replacement ratio for the company over the past ten years has been close to 120%. The company has one of the most diverse asset bases, and the current reserve levels can meet the production levels of the company for the next 16 years at the current production rates. The strong asset base should allow the company to enhance its production and increase its cash flows.
In my opinion, Exxon Mobil is one of the best dividend picks - the company has been growing dividends at an impressive rate for the past 31 years, and the massive cash flows should allow the company to continue its tradition in the future. Furthermore, the diverse asset base and huge reserve levels should ensure the production levels for the foreseeable future, resulting in the earnings and cash flows visibility. There is a lot of room for the company to alter its capital allocation - a huge chunk of cash goes to the share repurchases, which can be diverted towards the dividend payments as well as capital expenditures if need be. The financial situation of the company is extremely strong and it should not have any issue in growing its dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.