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Exxon's Q1 Shows The Deep Journey Into The Woods

May 04, 2020 8:48 AM ETExxon Mobil Corporation (XOM) Stock64 Comments


  • Exxon Mobil reported lackluster Q1-2020 results.
  • Cash flow strains are already showing up.
  • But more than that, we got a "tell" on why the dividend is unsustainable.
  • I do much more than just articles at High Dividend Opportunities: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Exxon Mobil (NYSE:XOM) certainly creates mixed feelings for us. On one hand, the company is a behemoth in what is a neglected and undervalued sector in our opinion. On the other hand, we don't want to buy it just for the reason everyone else is piling on into it - the large dividend yield. The company reported Q1-2020 earnings and we thought it tipped its hand rather notably on the key reason we think the dividend is unsustainable. We break down the results and give you our take.

The results

XOM's Q1-2020 reads like a badly scripted horror show with GAAP loss of $610 million thanks to large write-downs.

Results included a $2.9 billion charge from identified items, or $0.67 per share assuming dilution, reflecting non-cash inventory valuation impacts from lower commodity prices and asset impairments.

Source: XOM Q1-2020 press release

XOM broke down changes from Q4-2019, most notable of which was the Norway divestment.

Source: XOM Q1-2020 presentation

While the GAAP loss might be due write-downs, even outside those we would note that XOM remains extremely commodity price sensitive.

Source: XOM Q1-2020 presentation

70% of the entire delta versus Q4-2019 was produced via price changes in the underlying commodities. Total adjusted earnings were down so much despite refining margins actually moving up versus last quarter and volumes moving higher (slide above).

Source: XOM Q1-2020 presentation

In fact, even XOM's mix of liquids to gas production moved favorably for the company this quarter.

Oil‑equivalent production was 4 million barrels per day, up 2 percent from the first quarter of 2019, with a 7 percent increase in liquids partly offset by a 5 percent decrease in gas. Excluding entitlement effects and divestments, oil‑equivalent production was up 5 percent from the prior year, with Upstream liquids production up 9 percent on growth in the Permian and Guyana.

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This article was written by

Trapping Value profile picture

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Comments (64)

David-McCormick profile picture
Thank you for a timely article. These are exciting times in the oilpatch. Fortunately, compared to many others, XOM has a stronger balance sheet. I am concerned we will have more downside in petroleum prices before the "delcine curves" slow domestic production. This could hit earning hard for all the majors -- and bankrupt smaller players. I have "recognized" or harvested my tax losses on high basis XOM. I am hoping that is behind me at this juncture. Thanks again for a great article.
A better move is to buy out CNOOC share of Stabroek Block where production reached 80,000 BPD, while price is low and PRC pivots to develop major domestic discoveries.The election recount begins this week as black swans, bears, and caiman delay progress in the industry.
"The cut, though, is not to be feared as it likely will create a capitulation for a long term move higher. We still think, though, that XOM will provide compelling value to investors on a relative basis and outperform the broader indices over the next decade by a wide margin."

The long term move higher: Is this just from the capital preserved after a div cut? After loading up on debt, reducing capex and the predicted years of low priced oil, what is the basis for the "long term move higher", "compelling value" and _outperformance_ by a "wide margin"?
Trapping Value profile picture
Oil will go to $80
Raising new debt to just to cover dividends must be the stupidest policy ever. If you cannot afford to pay dividends, then just dont pay it!
Trapping Value profile picture
I think it is fine to do it right at the bottom of the cycle. Generally supermajors want to me debt free at the top of the cycle, be cash flow neutral in between and possibly issue debt at the bottom. But you want to make sure that you can see that end where you can buy back debt. XOM has no end in sight to its debt issuance.
Jeremy Blum profile picture
Exxon is one of the lowest leveraged oil & gas companies out there. It has a AA debt rating. It has plenty of capacity in the short run (2020 into 2021) to add debt in the bottom of the cycle. I expect them to do it to cover the cash drain, dividend and buy assets cheap. If we are in mid-2021 and crude is still sub-$35, then their thinking might change.
Trapping Value profile picture
What is your opinion of a breakeven price for XOM"s cash flow? I think it is over $80 crude (keeping NG and refining constant)
The 10 billion cut in capital spending nearly covers the current annual dividend. And cash generated from operating activities during the past twelve months is approximately twice the current annual dividend. I think the author is putting too much emphasis on GAAP earnings, EPS and the income statement. The CEO stated that they don’t intend to cut the dividend and I believe him. Elon Musk makes irresponsible statements to the public, but most CEO’s know better.
Trapping Value profile picture
"I think the author is putting too much emphasis on GAAP earnings, EPS and the income statement."
Literally the whole case for the dividend cut is based on cash flow. Which article did you read before commenting on this one?
I read your entire article closely. I assume most authors state their most important points in the first part of their document. The first few paragraphs of your article are talking about the income statement. Once you get to cash flow you ignore some key cash flow points. Are you certain you “have no positions in stocks mentioned?” No shorts?
Trapping Value profile picture
What key cash flow point have I ignored?
I have no shorts but my largest long position is in IMO which is controlled by Exxon.
Great article and I agree 100%.

Exxon has some of the most loyal and faithful shareholders in the world and quite frankly they won't believe it until they see it regarding a dividend cut. But the math doesn't lie, you cannot outspend your cash flow forever and the cash burn is just too large to ignore here. Based on the massive bond offerings last month I would bet that we have two more quarters of the current dividend and then Exxon cuts it or resorts to paying a scrip dividend in lieu of an actual cash dividend.
Trapping Value profile picture
Scrip dividend would be an interesting option. They might go that route if they saw an oil spike 1-2 years out. Otherwise that may create even more problems for them.
37 straight years of raising dividend needs to be a big part of any dividend analysis. I don't think you mentioned their track record, unless I missed it.

This, at least to me, is one of the few stocks to be prudent and cut down on buybacks. Though that's more of a recent trend since 2015 or so.

XOM will do anything to keep the dividend. And they'll likely eek out another increase to maintain growth track record. Probably something like 3-6%.
PapaWhisky profile picture

"37 straight years of raising dividend needs to be a big part of any dividend analysis."

No, it doesn't.

It really, really doesn't.
Trapping Value profile picture
19 dividend aristocrats cut between 2009-2010. What XOM faces is 5 times worse than what it faced during the GFC.
Buyandhold 2012 profile picture
"XOM will cut its dividends within 1-3 quarters."

No, it won't.
PapaWhisky profile picture
@Buyandhold 2012

Unspoken here is the credit rating. As the borrowings increase agencies will cut.

What is the relative importance of a solid dividend history versus an A credit rating.

They are Aa1 now with a negative outlook.

Or as the other Papa wrote:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”
Trapping Value profile picture
XOM's move on that chart is the key thing. They cannot have another year beyond 2020 where they move like they will 2019-2020. Three more years and they will drop below investment grade.
Cuip99 profile picture
The cut is not tell it is prudent management in a down time. If things are down now is not the time to spend money on whatever. I think of XOM is solid performer and will stay that way. It just chugs a long doing what it does.
I'm not sure how to feel on Exxon, they probably can maintain the dividend but unless current circumstances change drastically it will destroy the balance sheet even more. Recently my only adds have been through dividend reinvestment, I have no plans to sell though.
Trapping Value profile picture
There is zero chance they maintain. All the platitudes Mr.Woods is throwing have no ability to change the facts here. The earliest we will see $60/barrel is Q3-2021. Even that level is not enough to stop the debt from growing if dividends are maintained.
"Zero chance they maintain" I see you've dusted off your crystal ball. Tell me something: If it's so guaranteed that they will cut, why not do it now when it would surprise no one? I think your prediction (0% they maintain) is a pretty arrogant statement and is far from fact. This ain't their first rodeo, and I'm betting that they will not only maintain the dividend (because the PPS will rebound), that Exxon will emerge stronger as they navigate through this demand shock.
Trapping Value profile picture
Clearly on this message board there are many in denial and they will be surprised. Longer they wait, bigger the cut. The funny thing is they would have a deficit this year even if they eliminated the dividend.
"inability to actually create a payback cycle". This.
Trapping Value profile picture
Yes the rating agencies follow that closely and they want firms to pay down their debt at whatever are peak cycle oil prices. That may be $80 bucks but if XOM cannot pay back at $80 and at best is keeping debt flat, that is a problem.
ok so wait for the dividend cut to cause capitulation then buy. Got it!
Trapping Value profile picture
Not a bad point to take a position here too. You can sell calls to improve your returns.
andrew19067 profile picture
A solid article, and yes, it makes financial sense for the div to be cut; and what an opportune time for XOMto take advantage of the crisis to get themselves financially squared-away. But then what happens to the share price? And how will ExxonMobil cutting the dividend affect the Dow Jones? No positive answers for either question, unfortunately, in today's short-term-oriented world.
Good article explaining the cash flow situation. Their dividend is definitely getting cut, it's just a matter of when. My guess is next quarter. I used to own this company, but there are so many better options out there.
vooch profile picture
Solid article - especially the cash flow forecasts.

I think your cash flow forecast might be optmistic. What happens if Q3 is similar to Q2 ?

nearly $30Billion negative FCF in 2020.
Trapping Value profile picture
Yes it is possible that my Q3 numbers are too optimistic but I don't see anything close to Q2-2020 even in the worst case. We could go closer to $25 billion in negative free cash flow but Woods will chop the dividend before that.
vooch profile picture
@Trapping Value

Thanks for the thoughtful response. Here's my thoughts -
based on Wuhan recovery, we are seeing rush hour traffic about the same as pre-Corona. Weekend and discresionary traffic remains way down.

Admitedly one data point, BUT if one models to R.O.W.; one concludes that Q3 oil transportation demand will be way down.

Admitedly, there are many unknowns and guess work and confirmation bias BUT, I tend to be risk adverse.

FD - long XOM with 1/2 position. about 5% 'energy' weight in Portfolio
Trapping Value profile picture
Yes Wuhan recovery is slower for sure, so also other China metrics are just coming back awfully slow. No disagreement there. My thinking though the catalyst will be more wider use of serology tests that confirm infection/immunity.
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