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Exxon Mobil: Stop Spending Already

Mar. 10, 2020 9:05 AM ETExxon Mobil Corporation (XOM)BP, CVX, TTE101 Comments


  • 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.

Exxon Mobil logoImage 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

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This article was written by

Stone Fox Capital profile picture

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.

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Comments (101)

@Stone Fox Capital Well, Captain CapEx just cut it down to $23 billion from $33 billion.
BigGuy profile picture
Investing into XOM now for the first time, look to buy on a panic down day in oil prices which would send the stock to a new low below 33. Investing for the second time, double up if and when the dividend is cut.

If you buy XOM now with the yield very high, it'd be wiser NOT to use the dividends for current income, but set up your holding with automatic dividend reinvestment.
Stone Fox Capital profile picture
Like how you think about the dividend. Also like how $XOM had held here in the $35 range. Oil is down substantially, but the market isn't throwing away the stock anymore. Nice purchase.
Stone Fox Capital profile picture
took long enough, but the company is still too busy protecting the dividend.

-Exxon Mobil (NYSE:XOM) says it is "looking to significantly reduce spending" due to the coronavirus pandemic and weaker oil prices, as shares slump to a 17-year low.
jack kreg profile picture
You must see the future, nice and timely article!
Good for you!
XOM is serious buy when yielding near 10%! Wow, when was last time that happened?
Stone Fox Capital profile picture
@jack kreg
Never... At least that is what Ychart shows.
AlphaElephant profile picture
Got your wish
Stone Fox Capital profile picture
My "wish" was for a logical cut, not a forced cut.
AlphaElephant profile picture
@Stone Fox Capital I agree, long $XOM.

Its looking more and more likely that a dividend cut comes soon for XOM and other Oil majors; dividend freeze would be fine by me at this point.

I've lowered my $XOM cost basis and div yield significantly this year, and bought RDS.B. Too early? Perhaps, but I'm holding.

The only positive here is debt is super cheap, so if they can borrow their way through the KSA/RUS pumping war, maybe the dividend is sustained.
Stone Fox Capital profile picture
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.
It is "VERY TEMPTING" to buy Exxon at the current price of $38 and a yield of 9%.
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.
Stone Fox Capital profile picture
The total return would probably improve w/o the dividend.
Royal Dutch Shell cannot break when oil falls below $50/barrel. Exxon does not release a break-even figure, but it's probably at similar level. Barring outbreak of an actual war (e.g. between Saudis and its allies vs. Iran), it seems unlikely there will be higher oil prices any time soon. Hard to see when XOM will ever have sufficient revenues to cover its present dividend (with recent share price falls, it stands at extremely tempting 8%).
Stone Fox Capital profile picture
@Atomic Lobotomy
Don't forget that $XOM considers breakeven when they sale assets to boost "free cash flows". Can't sell assets now.
GR Value profile picture
@Stone Fox Capital

Yep, basically something like 25% of the investing cash flow was always covered by something other than earnings. Debt, payables, lower capex at times. This applies to most of the majors. It's the same strategy used by retail that are now all going bankrupt or down 50-75%.

I don't think the war ends soon because I believe Russia and OPEC have united and this war is especially potent and opportunistic in the travel halts to try and bankrupt Shale. In other words, this is an unprecedented opportunity for both of them to flood the markets with oil all day every day, use has plummeted even without that, and bankrupt high levered Shale. Yesterday they were selling millions of barrels directly to Europe at $25.

If these majors pay billions per qtr out of debt, it would be long term toxic. As is, I think XOM is heading to and worth $30.
Stone Fox Capital profile picture
@GR Value
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.
I am sure that this author has stress tested all the XOM projects and has a better insight than thousands of specialists....
Stone Fox Capital profile picture
@The crystal ball investor
What does stress testing have to do with the 50% stock dip?
So very few people do not understand Exxon: the leadership is cold, calculative, and disinclined to panic over fluctuations in prices. They look at the long term projections of increasing global demand corresponding to a rising middle class in Asia thirsty for energy in a business in which supply is always in depletion. The oil business requires nerves of steel and untold patience. On the other hand, if Mr. Woods can cut back on developing the Permian project by 10 percent, perhaps he can go further. I leave that to him. I would not pull out of Guyana for anything: that’s the future.
XOM has also under performed for a while now. Just hope that Mr. Woods' cold calculations eventually result in capital appreciation and decent total returns. We're patient. Been in it for a long time.
All the majors need to cut back on capex and preserve capital we do know the total downturns in oil the coronavirus will bring.
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.
Stone Fox Capital profile picture
Yes, buy cheap assets and quit trying to bring more supplies on the market.
Albert Einstein is widely credited with saying, “The definition of insanity is doing the same thing over and over again, but expecting different results.”
Widely credited, because of the internet. There is no original attribution of that quote to Einstein. People who keep claiming that a clever quote came from [Einstein, Twain, Disraeli, Churchill, Antionette] are doing the same thing over and over again.
g23riel profile picture
Or some or all could have said it. I certainly have heard a number of “Einsteins” use it.
Stone Fox Capital profile picture
@Sugar Charlie
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.
AEGISBMD profile picture
Hey, hope its not too late to get into Solyndra, Beacon power, and A123...
There may be a chance that XOM knows more than naysayers think the leadership is simply spending tens of billions of dollars just for the hell of it. One burp from Saudis and Russians are carried, by the ill-informed (IMO) than the hundreds or thousands of people inside XOM that do energy world wide on a 24/7 basis.

I'll give XOM the benefit of the doubt. More likely, imo, XOM, CVX, and RDS.A/B are looking for opportunities that abound when Oil is $30/bbl and all the pundits are clamoring that the spot is going lower.

Mr. Market is selling when he should be buying Big Oil cos, imo.
g23riel profile picture
They probably can gobble little companies and still be bailed out if needed. XOM and CVX are megacaps, true monstrosities and US would be dumb to lose them.
In 3 hours, about 9 pm GMT we may read the ruling of the Guyana High Court on curtailed elections on 2 March after which the ruling regime claimed victory on incomplete results. If, as expected the opposition wins, a new, more business-friendly regime will ensure speedy approval of Exxon plans for Payara and Hammerhead oilfields offshore. Then Exxon will be free to develop and innovate for another 5 years. COVID-19 will be eradicated if people follow advice on hygiene. Healthy lifestyles will evolve and countries can grow the economy without PRC investment, cut imports and promote local talent Now is the time to reflect on basics and prune dead wood. All hands on deck will usher in a rosy future.
Stone Fox Capital profile picture
@sally radford
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?
Best and brightest
Stone Fox Capital profile picture
$XOM needs to follow $OXY in slashing the quarterly dividend... at least for now.
g23riel profile picture
Yeah, these are unprecedented times, if shareholders don’t like it then they can hit the road.
If the government's of the world slip into recession they are going to have a harder time justifying wasting their tax payers money subsidizing the construction of wind mills. Especially when all this "Green" energy is making people's electric bills go through the roof. So I hope Exon keeps spending, kill this "Green" energy nonsense off and regain market share.
Stone Fox Capital profile picture
green energy isn't that expensive anymore, especially in comparison to normalized energy costs from nat gas.
AEGISBMD profile picture
If you think green energy isn't expensive, you haven't tried to get a solar field or wind turbine farm in somebody's backyard.

So I assume you don't mind them behind your house...
Stone, I think your normalized figure may be much higher than current price levels, correct? Maybe over $3.25?

At current prices, chemical plants and natural gas fired electric generation plants are looking pretty attractive and can delay more spending on green projects
BigGuy profile picture
I'm delivering my XOM stock from MS to Schwab. I plan to double up.
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.
Stone Fox Capital profile picture
Not against doubling down here, but consider that $XOM "buying reserves" on the cheap also ensures they'll sell those reserves on the cheap. The whole problem with the investment concept is that people are still acting like pumping more oil is the solution.... it's not.
Henry Miles profile picture

Perhaps you're not aware that the Rockefeller's were again ahead of their time when 5 years ago they distanced themselves from fossil fuels: www.reuters.com/... Exxon is the dirtiest of the dirty.
AEGISBMD profile picture
That's just PR for their "legacy". Easy to distance yourself now. I wonder if they are giving away all that oil money?
Chris Lau profile picture
Kudos to this author for talking me out of weighing more in energy just for the dividend yield. Saved DIYers lots of grief. No one saw the energy war coming.

There are positive upsides ahead. Maybe SA/Russia make up? USA may support the industry. Or nothing happens.

So I will sit on my paper losses and collect the dividends in the energy sector.
Bim Ska La Bim profile picture
Same... so tempted to buy more, but...
Power Hedge profile picture
XOM has been having trouble covering its dividend and share buybacks for years. I published an article on this a few years back and people got really upset with me.


The company appears to almost be in a controlled liquidation as far as I can tell. It is borrowing money in order to buy out its shareholders. It's also been struggling to even grow its production with oil prices at much higher levels than they are today. All the American majors have been having the same problem.

The IEA says that global oil demand will increase by about 9% over the next two to three decades. This is a lot lower than both natural gas and renewables but it does still show that demand for oil isn't going away anytime soon. ExxonMobil has a really nice portfolio of natural gas assets but they need prices to be a lot higher for this to really be profitably exploited.

Russia refusing to agree to production cuts seems to be Putin trying to get revenge on the United States for the sanctions. It's not the Saudis declaring war on oil prices. The budget of Saudi Arabia can't handle oil prices this low. And at today's level, the American shale producers are in a lot of trouble. The Russian budget is actually pretty well equipped to weather this. So this looks like Russia being really ticked off about the US supporting the Saudis with regards to Syria and the Nord Stream 2 pipeline.
Stone Fox Capital profile picture
@Power Hedge
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.
Nonsense. You don’t invest and liquidate at the same time.
With a yield of 8% I couldn’t pass it up. Even if they chopped it in half I’m good. Long term keeper.
Stone Fox Capital profile picture
What good is the yield, if they don't generate the cash to cover it?
Maybe not now, but I don’t see XOM going anywhere. These low oil prices are likely to drive some companies out of business which should increase market share for the big boys XOM, TOT RDSA....If that happens the spending now may be a good thing. I certainly can’t complain about a $41 entry point and getting 8% to wait (11% on my RDSA). Seems low risk to me.
I grabbed 10K sh of XOM and rds.b yesterday 8.1% and 10.75% respectively. I feel blessed. retirement can now happen a year earlier, mailbox money just increased for me by the equivalent of a year of DRIPing. long abbv, mo, xom, mo
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