Exxon Mobil: Stop Spending Already
Summary
- Exxon Mobil held an Investor Day last week where management promoted heavy spending in the next few years.
- Saudi Arabia declared a price war in the oil market after Russia didn't agree to production cuts.
- The stock isn't a buy until the company outlines plans to cut spending when oil prices are below $50/bbl.
- Looking for a helping hand in the market? Members of DIY Value Investing get exclusive ideas and guidance to navigate any climate. Get started today »
Heading into their investor day, the market wanted Exxon Mobil (NYSE:XOM) to outline a path to where the company generates cash flows to cover the dividend. The company didn't assuage investor fears on out of control spending sending the stock to new decade lows. With the stock below $50 due to the market selloff and historic price war in oil, my investment thesis is no longer bearish on the stock.
Image Source: Exxon Mobil website
Untimely Spending
Exxon Mobil used the investor day on March 5 to outline continued spending on developing global oil assets. The oil market collapsed on March 6 as Russia refused to agree to cutting oil supply.
Ali Khedery, former senior Middle East advisor Exxon and now CEO of U.S.-based strategy firm Dragoman Ventures, predicted oil will dip to $20/bbl this year.
Exxon Mobil just made untimely forecasts of spending up to $33 billion on capital spending this year with up to $35 billion in future years. The energy giant only spent $31 billion on capital spending last year and this collapse of oil prices to $30/bbl doesn't support spending aggressively on increasing production.
Source: Exxon Mobil 2020 Investor Day presentation
CEO Darren Woods didn't deliver what the market wants to hear with these statements:
Using the strength of our balance sheet to invest through the cycle is a key element of our strategy. We are taking advantage of a favorable cost environment and investing in advantaged projects - underpinned by the long-term fundamentals of growing demand. The strength of our portfolio and our financial capacity enable us to continuously evaluate our priorities and the pace of investments while preserving value, which is critical in current market conditions and near decade-low commodity prices and margins.
The CEO went on CNBC to reinforce the desire to pump oil wildly with prices below $40/bbl. The management team still doesn't seem to understand the difference between generating a positive return and an ideal return large enough to cover spending and the dividend.
One of the key issues here is whether oil is even underpinned by long-term growing demand. The company makes a case for 860 million people living without electricity and the likelihood that energy demand will increase. Unfortunately, Exxon Mobil didn't necessarily make the case of increased demand for oil as wind, solar and bioenergy become more viable solutions in the next two decades.
Source: Exxon Mobil 2020 Investor Day presentation
Limited Optionality
While freely understanding the concept of investing through the cycle, the energy giant has failed along with the sector of developing production optionality. The industry is still generally besieged with the concept of drilling a well and selling the energy product that comes out of the ground.
In this manner, Exxon Mobil does discuss some optionality with the development plan for the Permian basin. The issue here is the company only plans optionality along the growth rate of production, not scaling back production as oil prices are below target prices.
Source: Exxon Mobil 2020 Investor Day presentation
The lack of optionality should have Exxon Mobil taking on less aggressive drilling programs in either the Permian or Guyana. Just in the Permian, the energy giant had plans to nearly triple production levels from ~360 Koebd in 2020 to over 1,000 Koebd in just four years.
The new plan still has Exxon Mobil producing far above 400 Koebd in 2021, up from around 272 Koebd last year. The company needs to develop plans for ramping up production in the Permian when oil prices are more attractive and capping production growth when prices are below $50/bbl.
Despite all the positive points regarding generating strong returns on capital deployed and shareholder distributions, the market doesn't like the growing debt levels compared to peers such as Chevron (CVX). In that last five years, Exxon Mobil has gone from a net cash position to a net debt level of over $42 billion. Chevron took the same path as Exxon until a few years ago when the energy company started cutting back on debt to where the company now has half the debt levels of Exxon.
Data by YCharts
Exxon Mobil has seen total returns far below other industry peers over the last five years. The combination of excessive spending, increased production and unwarranted dividend hikes has led to a stock that is down substantially in the five years while competitors like Chevron, BP (BP) and Total (TOT) had all seen modest gains before the market collapse on Monday.
Data by YCharts
Takeaway
The key investor takeaway is that Exxon Mobil is headed towards a rough week with oil prices collapsing into the $30/bbl range. Depending on where the stock ends new week, staying bearish on Exxon probably isn't the correct play. The stock already hit a low of $40 at the open this week with oil collapsing nearly 30%. A 50% decline from the yearly highs above $80 isn't the place to now sell the stock.
Unfortunately, until the CEO decides that aggressively spending isn't the answer, the stock isn't a buy. Exxon should actually drastically cut capital spending and look at acquiring bankrupt shale players to reduce total production assets on the domestic market. Until a combination of these outcomes occurs, the stock is likely dead money despite a 7.3% dividend yield.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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Comments (101)
Good for you!
XOM is serious buy when yielding near 10%! Wow, when was last time that happened?
Never... At least that is what Ychart shows.
My "wish" was for a logical cut, not a forced cut.
Not so sure about the divy cut, but I'm going to do some work on it today. $COP only cut 10% of the capex budget, but the company did reduce quarterly share buybacks by $500M per quarter (the advantage of buybacks). The negative is my constant problem with the sector. The moves aren't expected to impact productive capacity... pump, pump, pump.
The question is though, "Will they remain a dividend aristocrat or will they have to cut the dividend"?? I think I'll take a nibble at $38 and see.
The total return would probably improve w/o the dividend.
Don't forget that $XOM considers breakeven when they sale assets to boost "free cash flows". Can't sell assets now.
Yes, Russia and Saudi have no reason to blink anytime soon. Just wonder if it ends up badly for them b/c US shale will lower costs again.
What does stress testing have to do with the 50% stock dip?
The companies need to build reserves but they may be able to buy the assets on the cheap from smaller producers who can not afford to maintain their positions.
It will be a rough year with all of the things going on Cash is King.
Yes, buy cheap assets and quit trying to bring more supplies on the market.
Yes, Exxon is now hurting itself b/c they went through the period of not focusing on growing production and instead focusing on buybacks. What they should be doing is slashing capex and the divy and buying some very weak shale players. What if they scooped up $CHK or $OXY? Occidental was nearly $70 last year and only $12 now.
So you are promoting $XOM spend even more money to bring even more oil out of the ground? Did you invest in $CHK all the way down?
green energy isn't that expensive anymore, especially in comparison to normalized energy costs from nat gas.
Here's why.XOM is a big company, only BP and RDS are bigger. BP and RDS are continuing to retrench. Oil prices are down and look to go lower. The whole industry is cutting back and that may be the right thing to do. Instead of cutting back, XOM is expanding its reserves and its production. How can that make sense? XOM is buying reserves cheap. XOM is buying oil field services on the cheap. XOM borrows money at cheap rates to do all that. Standard Oil of New Jersey was founded in 1870, 150 years ago. Rockefeller always expanded during lean times. Standard Oil's progeny, including XOM, also used their size to get even bigger when times were bad. That's always worked out. Sometimes great success has taken 20 years, but moderate success has nearly always happened within 5 years. I think it'll happen this time too.
Wouldn't blame both Russia and Saudi colluding to take market share back from the US shale producers. If they don't do anything, the US producers will just keep borrowing to pump more and more and more oil. Just look at what we did in natural gas. Agree, it is slow liquidation. The joke is that most shareholders don't even realize it.
What good is the yield, if they don't generate the cash to cover it?