Exxon Mobil (NYSE: XOM) recently gave its full-year earnings results and set up some basic guidelines for 2016. As most of us know, crude oil prices tumbled once again in the fourth quarter. At one point, the price per barrel of crude oil dropped below $30. At that price, hardly anybody is making any money, and quite a few are in fact losing money.
Exxon is situated on some of the highest ground a retail investor can access in the E&P space. The company has the highest credit rating of any of the majors. And while production growth prospects are very slight, Exxon owns large scale, long-lived projects that generate cash flow even at a low oil price. While Exxon isn't doing so well, the company is much better suited to get through this environment than the vast majority of other E&Ps are. Chances are that's exactly what management is banking on. This article looks at what 2016 may look like for Exxon Mobil.
On the year, Exxon's upstream earnings dropped from $27.5 billion in 2014 to $7.1 billion in 2015. Downstream made up for some of that, rising from $3 billion to $6.5 billion. With midstream and chemical factored in, Exxon earned $16.2 billion. While that may not look so bad, the fourth quarter was unsurprisingly the toughest. Earnings in this quarter dropped to just $2.78 billion. That's much less on a quarter-per-quarter basis.
As for cash flow, Exxon generated $30.5 billion, but spent $31.1 billion in capex and $12 billion in dividends. Exxon made up most of that difference from debt, but also drew its cash down from $4.7 billion to $3.7 billion.
Back of the envelope
The big question is whether Exxon can continue paying its dividend next year and beyond. To understand this, we must first understand Exxon's capital spending plans. This year Exxon will allocate $23.2 billion to capital expenditure, which is a 25% reduction; meaningful, but still relatively modest. If we assume a dividend of $12 billion, then Exxon will need $35.2 billion to break even. Remember, last year Exxon generated $30.3 billion. If we assume the same operating cash flow as last year, then Exxon falls short by almost $5 billion.
Of course, I fully expect Exxon to achieve at least a couple billion in operational savings. In addition, Exxon has 10 major projects still under construction, six of which will be completed this year. That should also contribute to cash flow. On the other hand, crude oil prices are considerably lower than they were a year ago, so there are several factors at work. If cash flow remains as it is, Exxon will likely take out another $4 billion or so in debt in 2016.
Will Exxon be able to do that without a credit rating cut? Yeah, I definitely think so. Exxon is not on any watch by Moody's, and the company has the capacity to take on more debt and carry on if it needs to, especially if there is some type of oil recovery. If oil stays low for another five years, then I'm sure Exxon will cut at some point, but it appears management does not foresee this. In fact, Exxon has gone forward and completed its projects as if short-term price was irrelevant.
Exxon reiterated that it is a "price taker," but the conspiracy theorist in me says that Exxon is putting its new projects online to keep the oil markets well supplied, with the understanding that the company can "run out the clock" with its balance sheet. Prolonged low oil prices will take out a large swath of businesses. That will not only restore balance, but it will also give Exxon and others lots of acquisition opportunities in the future. Of course, that's just a hypothetical. I have no evidence that this is actually Exxon's strategy, other than the company's actions themselves.
One way or another, Exxon will be able to persevere through this price environment. Its relatively buoyant stock price is reflective of the market's confidence in Exxon. Exxon is much higher than most other E&Ps, but you will get what you pay for here. I still recommend Exxon, and do not recommend much else in the E&P space.
Later this quarter Exxon will hold an analyst day where it will give a more granular presentation of its capital expenditure priorities. At that time, I intend to write a more detailed piece on the company's asset profile and capex plans.
Disclosure: I am/we are long XOM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.