Exxon's Dividend, Safe Or Out: Safe

Summary

• After the recent drop in oil prices, I decided to examine the dividend sustainability of Exxon.
• For Exxon, Dividends + Capex are regularly above cash flows.
• Based on the weekly RSI, Exxon is at the most oversold level in the last 35 years.

Two weeks ago, I read an article discussing the possibility that the dividend of Exxon Mobil (NYSE:XOM) was not covered. The inferred reference of a dividend not being covered is the possibility of the dividend being cut. Having a dividend-growth focus, I decided to investigate the situation to see if in fact the dividend for Exxon is at risk. After digging through the financials and conducting a dividend stress test, I believe the dividend for Exxon is safe.

Image: source

Exxon History

One of the key arguments of the article was cash flows did not cover the dividend and capex. I decided to investigate this by examining the history of cash flows, debt and capex from each quarterly supplemental earnings presentation the company provides. For cash flows, I used “net cash provided by operating activities” data as shown in the image below, and I chose this because I wanted to use base cash flows and not have the variability of asset sales come into the equation (keep things simple).

Exxon Q4 2019 supplemental presentation

Shareholder Distributions

The first data set I examined was ttm shareholder distributions as a percentage of ttm cash flows. The most recent data shows nothing out of the ordinary in terms of the percentage being at an extreme level. While the percentage has been rising, it still is not at levels that occurred in 2015/2016.

Table data from Exxon supplemental presentations

Shareholder Distributions & Capex

As you can see in the table below, it is not uncommon for shareholder distributions + capex to exceed operating cash flow. The percentage has been increasing towards levels that were present during the oil crash in 2015/2016. This is somewhat worrying given the steep drop in oil prices over the past two weeks due to the coronavirus selloff. However, Exxon was able to maintain its dividend back then and I believe it will be able to maintain its dividend now.

Table data from Exxon supplemental presentations

Debt & Cash Flows

One difference between now and then is the fact that Exxon has more debt. Since distributions + capex exceed cash flows, part of the difference can be made up with the issuance of debt, which leads to the next table showing the ratio of debt to cash flows. The data shows just like previous data tables, the percentage is increasing but is not at levels that were seen during the 2015/2016 oil crash.

Table data from Exxon supplemental presentations

What all three of these data sets point to is, yes, the data shows a movement back to levels seen during the oil crash in 2015/2016. The question brought up then and is starting to resurface again is about whether the dividend is at risk. In the next section, I will be examining the debt maturity profile of Exxon and then followed by a dividend stress test.

Debt Maturities

One thing that comes along with many dividend cuts is a large amount of debt coming due. For Exxon I went to its recent 10-K to see what upcoming long-term debt maturities it had. Exxon does not have much long-term debt coming due in 2020 or 2021, with only $1.50 billion in long-term debt coming due in the first week of March 2020. Looking at this schedule of debt maturities and the interest rates Exxon is able to get, I am not worried about Exxon being able to continue funding its dividend + capex shortfall with additional debt.

Exxon 2019 10-K

Dividend Stress Test

For my dividend stress test, I wanted to be as harsh as possible with assumptions to show that even if Exxon increased its dividend only $0.02 per quarter/ $0.08 per year over the next 5 years, cash flows would still cover the dividend. The $0.02 per quarter comes from the amount Exxon increased its dividend during 2016 when oil prices were at low levels. The first table below shows the year/year percentage change in ttm CFFO. When the year/year change was negative, the average was a 25.18% drop in cash flows. For my stress test, starting with 2020, I assumed cash flows would be 25.18% below the level for 2019 and continue lower each of the following years by the rates in the second table below (half as much as previous year).

Table data from Exxon supplemental presentations

	CFFO Growth
2020 est.	-25.18%
2021 est.	-12.59%
2022 est.	-6.30%
2023 est.	-3.15%
2024 est.	-1.57%

Click to enlarge

In addition, I also assumed that Exxon would raise capital by issuing stock each year, thus increasing shares outstanding (I assumed a 1% increase in shares outstanding each year). Therefore, the result is a stress test built with declining cash flows, increasing dividend payments and increasing shares outstanding to make the stress as high as possible.

Dividend Stress Test Results

The results show that under this harsh scenario in five years of Exxon increasing its dividend $0.08/year (2019 dividend total $3.43), increasing shares outstanding 1% per year and cash flows declining each of the next five years, dividends as a percentage of cash flows are still slightly below 100%. Barring a clean sweep of Democrats taking the White House, maintaining their majority in the house and taking the senate, I do not see Exxon cutting its dividend.

Table data: Exxon supplemental presentation and Seeking Alpha Exxon dividend history.

Risks To My Thesis

The two main risks to my thesis about the dividend safety are the assumption that cash flows will not fall by a significant amount and that the current political party stays in power or branches of government remain divided. Looking at my historical chart for cash flow declines, the largest decrease in the ttm total was in Q3 2016 at just over 43%. In my model, I started with a roughly 25% decline in 2020 and if the decline is around the historical levels the dividend would be more at risk.

The other item that could impact the dividend safety of Exxon is if there is a clean sweep by Democrats in November. If that occurs, all bets are off because of the potential policies that could be enacted and their impact on Exxon and energy companies in general. If you have declining cash flows from low oil prices coupled with new anti-oil/gas policies, that could further exacerbate the cash flow declines for Exxon in the future and thus could put the dividend at risk.

Bonus: Technical Analysis

I added in this bonus section because there was an important technical level that was breached this week and should be addressed. The following chart (weekly scale) shows shares of Exxon closed lower this week than during the height of the financial crisis. This speaks to the panicked nature of the market and a sign of that is the RSI for Exxon is very low indicating the stock is extremely oversold. I looked back as far as I could on the chart (back to 1985) and there is no weekly RSI level lower than the current level. Based on the technical metrics, I believe Exxon is due for a bounce in its share price given the oversold conditions. Longer term, it will be interesting to see if the breakthrough of financial crisis lows on large volume is a false breakdown or if the share price will drift lower in the coming year.

*Chart scale is weekly.

ThinkorSwim

Closing Thoughts

In closing, after examining data on cash flows, debt, dividends and capex, I believe Exxon can continue paying its dividend, even if it means issuing more debt to do so. Given the steep drop in interest rates, I would not be surprised to see Exxon issuing debt in the coming quarter[s] and locking in low rates given its investment grade credit rating. Even under the conditions of my dividend stress test, at a minimum cash flows should be able to cover the dividends, so I have little worry about the dividend being cut.

The market will also be getting more information on Exxon this upcoming week as the company will be holding its investor day on March 5. One item I will be looking at is its projections for capex. The following chart from its 2019 investor day presentation shows projected capex levels and I will be interested to see how its future projections could change in light of the drop in oil prices.

Exxon 2019 investor day presentation

Disclaimer

Analyst’s 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.

I am only long recently purchased June 2020 $55 calls

Comments

[Brad Kenagy]

Exxon Maintains the dividend:

seekingalpha.com/...

[Brad Kenagy]

Just saw SP cut Exxon Credit rating from AA+ to AA

seekingalpha.com/...

[veridical]

I'm guessing all have seen this ?

seekingalpha.com/...

[Biological]

Yes, very good for tankers.

[tigerintheboat]

@Brad Kenagy ...I thought you wrote a very clear article stating your assumptions and projections. Your answers back to people are very patient. I appreciated the analysis as I am considering a purchase of both XOM and CVX at these oversold levels. I had read the previous article you mentioned about XOM not being able to cover the dividend.

What puzzled me was that in the disclosure you owned short-dated XOM options, which I imagine you now regret. Why not LEAP options or owning the stock outright? Or did you buy these before the current situation with the virus?

[Brad Kenagy]

@tigerintheboat , Thank you for the comment, glad you found the article clear. I try to make a point to be calm with responses. The Options I own are June $55 calls, so there is still around 3 months left to expiration. I purchased the options on February 25th, stock closed that day at $54.20.

[tigerintheboat]

I see...you ought at the money. Thanks for the quick reply.

[hopeinsf]

Amazing article on debt, capex, and cash flows for fundamentals, and RSI for technical
Buying more under 48

[Brad Kenagy]

@hopeinsf , Yeah technical's show XOM, is extremely oversold, if nothing else works, shares are due for a technical bounce. Weekly RSI of 13.96 and weekly MACD at level where in the past stock has bounced hard from.

[hopeinsf]

even with the Saudi Aramco price cuts?

[Brad Kenagy]

@hopeinsf , My comment was made before Saudi Aramco price cuts. Going to be an interesting day tomorrow.

[zukov]

"risks to my thesis about the dividend safety are the assumption that cash flows will not fall by a significant amount"-
THAT'S the whole point!!!! Relegated to near last; cash flow WILL fall. You possible could influence people to buy be more responsible. Oil is Exxon and when demand crashes the divy will too

[Brad Kenagy]

@zukov , Thank you for the comment. I would be glad to clarify for you: "Fall by a significant amount" clearly means by more than I projected in my dividend stress test.

This is just my opinion, just one data point readers can use if they choose to.

[ding dong]

Where did this come from:
"Barring a clean sweep of Democrats taking the White House, maintaining their majority in the house and taking the senate, I do not see Exxon cutting its dividend."

Completely non-sequitur. You did not analyze any politics to throw in that statement.

[Brad Kenagy]

@ding dong , Based on publicly available statements by those in the democratic party and their stance towards energy, I thought it was common knowledge that a clean sweep would be bad for energy companies. That line was the last line in my stress test section. Maybe I could have worded it better saying something like:

"Under my stress test scenario I do not see Exxon having to cut their dividend, an exception to that would be if democrats have a clean sweep in the election this fall. If that happened there would be a heightened risk of a dividend cut."

[ding dong]

Democrats can not tell companies not to drill outside of the US. They can tell them to get out of shale in the US (which by the way would be very bad for the economy from a report I saw cursorily.)

If that is the case you need to be more subtle about how it would affect the companies you follow.

[loudano]

It's obvious, democrats do not want fossil fuels and they run on that issue.

[Good1]

Ha - wasn't sucked into a dead cat bounce. Under 50 I'm nibbling.

[Cashflow Curator]

Is the dividend safe this milli-second, yeah probably. Going forward, please explain to me how a dividend rising as earnings and cash flows are declining is sustainable or safe? Or is the bet that after declining for 10 years, oil prices and with them the XOM earnings and cash flows will suddenly reverse their long term trend?

[Brad Kenagy]

@Cashflow Curator ,Thank you for the comment. As I noted, that is my dividend stress test. I do not believe cash flows for Exxon will decline 5 years in a row. The point was to show that Exxon could continue increasing their dividend even if very slightly.

[Cashflow Curator]

"I do not believe cash flows for Exxon will decline 5 years in a row."

Based upon what? Decline is exactly what they have been doing. Why would a "harsh as possible with assumptions" stress test assume a 180 degree reversal from historical data.

[Brad Kenagy]

@Cashflow Curator , Here are the last couple years cash flows:

Here is the historical data since 2014, cash flow from operations goes up and down with the price of oil.

2014 $45.2
2015 $30.3
2016 $22.1
2017 $30.1
2018 $36.1
2019 $29.7

Here is a link to the data:

corporate.exxonmobil.com/...

[bigdawg4444]

is this tidbit from M* report meaningful: "risks include larger capital spending to retain or amplify competitive position not returning reward if oil price plummets " (oil price has plummeted). Not sure how this changes their spending plans if at all. It sounds like if it does not this is a long term hold to reap the benefits of this competitive position investment.

[Brad Kenagy]

@jmoney149 , We will get more clarity tomorrow when XOM has their investor day presentation.

[HaroldL]

How did Exxon go from $5.70 billion in distributions in Q1 of 2014 to $3.10 billion in Q1 of 2016 without cutting its common dividend? See chart in this article.

[Brad Kenagy]

@HaroldL , Share repurchases.

[HugoTheImpaler]

45% of shares were repurchased?

[Brad Kenagy]

@HugoTheImpaler , Here is a link to the data source for you to check. It is directly from Exxon supplemental presentations.

corporate.exxonmobil.com/...

corporate.exxonmobil.com/...

[bongoFL]

Really good and thought provoking analysis ... Thank you!

[Brad Kenagy]

@bongoFL , Thank you, glad you thought the analysis was interesting.

[farwest]

"Two weeks ago, I read an article discussing the possibility that the dividend of Exxon Mobil (XOM) was not covered"

It ISN'T covered. It's not a 'possibility'. XOM will have to borrow money to pay the divvy. Curiously, CVX has a higher (and fully-covered) dividend, has better growth, raised it's dividend and increased share buybacks, plus a better balance sheet and has been paying down debt. Yet we see article after article saying 'the bottom is in, buy XOM'? smh.

[twfry]

That's because XOM's valuation is based on a market of retail buyers who do nothing but trust their history of maintaining/growing the dividend throughout the cycle. The end effect is XOM management knows they need to maintain this to the bitter end.

So instead of cutting the dividend to preserve cash as they should have 4 years ago, XOM keeps it and digs a debt hole.

This is the same as GE, GE held the dividend for the same reasons until it was way too late. XOM can not sustain current payouts, they have to be cut. But now when they do eventually cut the stock will crash harder because there is a growing debt issue, when never needed to be an issue if they just cut earlier.

After XOM cuts, and the stock crashes another 80%, that is the time to buy.

[Brad Kenagy]

@twfry , Thank you for the comment. I do not get why people keep comparing GE to XOM. They are/were an apples to oranges comparison.

With low rates and an investment grade balance sheet and cash flows to support interest payments, the dividend is not going anywhere.

[Un-Acceptable]

Saying that cant cover their dividend is just semantics.. You could simply argue that their dividend is funded just fine but they cant cover they CAPEX.. they currently spend over 20 billion on CAPEX.. Everyone wants to say the divi isnt covered.. but you could argue that from both viewpoints.

[coinman507]

Nothing like lower and lower intrest rates if your a big corperation and have to borrow money.

[forthelonghaul]

Double Down! I'm down on the first shares I bought but at the ridiculous price lately I've doubled down. Everyone counted P&G out for a period of years but they knew what they were doing and I believe Exxon does too.

[6019791]

Thanks for writing this. I'm probably not capable of this type of analysis, so I appreciate it.

In fact I opened a position in Exxon just yesterday. I had come to the conclusion that the dividend was safe based on two very obvious reasons. First, Exxon is a dividend aristocrat with 37 straight annual increases. thus I think they will increase the dividend slightly for the May distribution. Also in spite of COVID 19, I think oil is ready to move up. Increased spending by Exxon (while others are reducing it) is the right thing to do and will in the end protect the dividend.

Different angle: I received some good advice from a retired industry insider. The shale boom is not sustainable in the intermediate term, so we want to be invested in fully integrated global companies with other proven reserves. For this reason I have divested myself of companies like OXY and probably VET will get cut as well.

Current US$ holdings. BP, RDS.B, (ADRs), CVX, Exxon

[Buyandhold 2012]

"Exxon is at the most oversold level in the last 35 years."

So buy some.

[Brad Kenagy]

@Buyandhold 2012 , Please see my disclosure, I own June $55 calls.

[Un-Acceptable]

Bag holding since 69.. Lost a good 80 grand on this one.. only down 65 grand now !! .. oh yeah.. at any rate im only 34.. I can hold on to decades.. Nothing on margin just my own savings evaporating.. So I never stress about money or swings.. Enjoy your life and dont play with anything but your own money and it will recover eventually at least im certain on this.. If I thought the dividend was at risk I would also liquidate my holdings but I dont think XOM goes that route.. Saudi's want to keep oil prices proped up and I dont think coronavirus moves us into the next recession.. So lets see what investor day on March 5th as well as the OPEC meeting in Vienna bring.. Could be a 10% catalyst if we hear something positive from Darren for a change.

[Bruce Miller]

Hi @Brad Kenagy
Good to see someone actually considering cash flows in determining dividend sustainability. Don't see this very often here on SA.

I'm getting different CFFI coverage than you show. For example, 4Q19 shows:

CFFO: $6,352
Comm Div: $3,716
NCI Div: $35
Preferred Div: 0
Remaining to cover CFFI: $2,601

CFFI: $4,264

% coverage: 61%

Doing this using rolling 4Q to smooth out the usual CFFO quarterly irregularities for the past 10Qs gives

3Q17 .....157%
4Q17......107%
1Q18......123%
2Q18......110%
3Q18......121%
4Q18......134%
1Q19......106%
2Q19........88%
3Q19........71%
4Q19........64%

And yes, the most recent 4Q period coverages do indeed resemble XOM's coverage back in 2009-2012

Not sure I understand what you're showing by dividing the total debt for a quarter by the sum of the last 4Q CFFO. Clearly, you're trying to show the effect debt has on CFFO, and this is right-headed. But the actual interest expense is really a much better measure of this. With XOM this is a bit tricky, as they have two forms of debt interest: Interest expense and capitalized interest. The former is deducted from revenues and so has been taken out as an operational expense in arriving at CFFO. Capitalized debt is debt for a specific investment expense, such as setting up a drilling platform, and is treated as CapEx and so is part of CFFI. With XOM, 3Q19, Interest expense was $232MM (2.49% of CFFO + Interest Exp) and Capitalized interest was $191MM (2.1% of CFFO). Combined 4.6% is low for a large industrial like XOM, although it has been increasing.

Love your stress testing! You've given me some ideas......(uh oh!)

Your conclusion is exactly right. XOM's dividend is well covered. ICE in autos, diesels in trucks, turbofans on jets and diesel turbines in boats are not going anywhere anytime soon.

Thanks for a great review!

BruceM

[Brad Kenagy]

@Bruce Miller , Thank you for the comment. As I noted I got cash flows from operations from the supplemental presentations. Example of Q4 supplemental presentation was shown in the article here:

static.seekingalpha.com/...

[Bruce Miller]

Can you access Mergent on-line through your library?

BruceM

[Brad Kenagy]

@Bruce Miller , I don't understand the question, I have no idea what Mergent is and what library are you referring to?

[Entreri]

Dividend chasers are getting trapped.

Oil stocks are in for massive declines this decade as the world shifts away from oil. I ditched oil stocks years ago. XOM et al will be out of the S&P 500 before end of the decade.

The Green Revolution, started by Elon Musk and Tesla has changed the world.

China, where most new cars are sold, shifting rapidly to EVs. Europe same thing. US has lagged, beside California for now. More than 50% of oil usage is for vehicles.

[JDoe20]

So electricity just appears? Where can I buy one of those eTrees?

[Westexr]

@Entreri @JDoe20

Please buy more electric vehicles. They are very good for Exxon Mobil's business:

Exxon Mobil provides tremendous amounts of diesel fuel to mine the copper ore used to build electric vehicles. Then, Exxon Mobil provides huge amounts of natural gas to make the electricity needed to process the ore into finished copper.

Then, Exxon Mobil provides huge amounts of natural gas to make the electricity that is used to melt copper in an electric arc furnace. And, Exxon Mobil provides the electrical power for the machines that heat and extrude the copper into wire.

Then, Exxon Mobil provides the natural gas to make electricity needed to manufacture electric motors used in electric vehicles.

Exxon Mobil provides the huge, huge amounts of diesel fuel and natural gas required to mine and purify the materials used in electric vehicle batteries.

Exxon Mobil produces the natural gas to generate electricity to charge the EV batteries. (And no, most electricity does not come from solar panels or wind turbines.)

It takes a lot of oil to produce an EV, and Exxon Mobil produces that oil.

How Much Oil Is In An EV? Click on the link below.

www.visualcapitalist.com/...

Exxon Mobil provides the diesel fuel for the tow truck that rescues the EV when the battery is discharged with no charging facility for many miles.

Exxon Mobil provides the huge quantities of diesel fuel for fire trucks that extinguish the battery fires when EV’s crash, or the battery simply self-ignites while the vehicle is parked. Each battery fire requires 11,000 liters of water to extinguish, and the typical fire truck only carries 2,000 liters. And, there are LOTS of EV battery fires. So, LOTS of diesel fuel is required!

www.zerohedge.com/...

climatechangedispatch.com/...

When someone figures out exactly how to recycle the HAZARDOUS WASTE in worn out electric vehicle batteries, Exxon Mobil will provide the huge amounts of energy required.

When the electric vehicle expires, Exxon Mobil provides the tremendous amounts of energy required for the electric arc furnace that melts the copper and other metals in the vehicle.

[Rinascimento]

@Entreri

Talk is cheap!! I have a challenge for you; take your EV and make a test next winter in the Minnesota state when a arctic blast with snow and 0 degrees F and with snow drifts 4-5 feet high; let us know how you make out with your EV