Exxon Mobil: A Paragon Of Quality In These Difficult Times
- Exxon Mobil recently revealed financial results for the first quarter of its 2020 fiscal year.
- The company revealed the degree to which it has been hit and has hinted that the second quarter may be even worse.
- Even so, the firm continues to demonstrate quality and stability.
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Times are tough for oil and gas firms. This is true of all businesses in the industry, but one player that investors should keep a close eye on to understand the full impact of the recent downturn in energy prices and demand is Exxon Mobil (NYSE:XOM). As the large player in this market and with its hands in most major aspects of the oil and gas industry, Exxon should serve as a good barometer of what all is transpiring. More importantly for shareholders in it, the company just announced financial results for the first quarter of its 2020 fiscal year. With this announcement the firm granted shareholders a significant amount of information that shows a firm slowed down by, but far from stopped due to, the pain inflicted on the industry.
Some big changes
Tough times call for tough measures. Whether you’re a small E&P firm or a large, diversified behemoth like Exxon, this is always true. Nobody is spared from the pain caused by the COVID-19-inflicted economic fallout. Recognizing this pain, Exxon has done well to respond. But before we dig into these changes, we should first discuss where the firm stands today after its first quarter earnings release.
The quarter was something of a mixed bag for the company if you break it down by segment. On the whole, it was a lot of pain though. According to management, Exxon reported a loss of $610 million during the quarter. This was driven, in part, by the downturn in pricing in the oil and gas space, but another contributor was a $2.9 billion non-cash charge. A year earlier, the firm generated a gain of $2.35 billion. A better measure of the firm’s success might be cash flow. During the quarter, the firm saw operating cash flow of $6.27 billion. This excludes $86 million in net inflows associated with asset sales. By comparison, in the fourth quarter of last year, the company’s operating cash flow was $6.35 billion, while its first quarter 2019 cash flows were $8.34 billion.
Either way you look at things, you can see a clear deterioration in the enterprise as a whole. Even so, cash flows looked fairly robust. When you drill down by segment, things get a little more interesting. Clearly, as you can see in the image below, the company’s US-based Upstream segment took a beating. Really, most other parts of the enterprise did as well, but the situation is more nuanced than just saying that low prices hurt Exxon.
During the quarter, for instance, the company’s US-based Chemical operations fared surprisingly well. Due to the drop in low pricing, liquid feedstock costs were low. At the end of the day, general energy pricing for the firm’s Chemical segment is less important than the spread between the price the firm pays for feedstock and the price at which it sells the finished product on a boe (barrel of oil equivalent) basis. Even as industry capacity additions pinched Chemical, the segment’s margins more than offset that.
None of this should be used to distract from the fact that Exxon really didn’t have a pleasant quarter. Having said that, management understands what they must do. As a result of the recent downturn, the firm made the conscious decision to cut capex spending by about 30% from $33 billion to $23 billion. Some of this decline, they said, is actually a result of improved efficiencies and benefits that lower pricing brings. To the extent that this is true, that’s excellent for shareholders. However, there’s no clear distinction between how much of that $10 billion change is attributable to those categories and how much should be chalked up to the slower project pacing management also cited.
This slower project pacing involves multiple areas of the business, including Upstream work associated with the Permian Basin, and the firm’s Rovuma LNG work in Mozambique. It also will affect the expansion in Downstream and Chemical facilities the firm has been working on. The delay in the Permian is particularly unpleasant because of the role that’s expected to play in Exxon’s long-term growth strategy. It’s hard to tell the full long-term impact this will have on the company’s operations, but management did provide some clarity.
In the first quarter this year, production surged 56% to around 0.98 million boe per day. This is tremendous growth, but for 2020 as a whole, Permian output has been revised down by 15 thousand boe per day compared to prior expectations. The real impact here, though, will occur in 2021, when the disparity will reach between 0.10 million boe per day and 0.15 million boe per day. In Guyana, these changes will also push out the company’s goal of achieving 0.75 million boe per day of output by one year.
Such amounts are fairly small compared to Exxon’s total production, but they are still vital to the firm. After all, despite the fact that organic production in the first quarter rose by 9% for the firm’s Upstream business, total production was more or less flat. This was due to divestments, including the firm’s sizable Norway sale. It was only the growth from the Permian, as well as the ramping up of other projects like Guyana’s Liza Phase 1, that offset the impact associated with that sale.
*Taken from Exxon Mobil and Seeking Alpha
With the second quarter this year already underway, management has a relatively good idea as to what investors should anticipate. The firm currently expects for economic conditions to affect its production by around 0.40 million boe per day. This will be on top of 0.10 million boe per day created by lower seasonal demand in Europe. To prepare for these difficult times, management has done well to load up on cash. At the end of last year, the company had $3.1 billion in cash and cash equivalents on hand. Despite low operating cash flow, continued capex, and $3.7 billion paid out for distributions, $12.1 billion worth of debt and other financing activities have been instrumental in pushing the firm’s cash reserves up to $11.4 billion.
One big fear some investors might have at this time is that Exxon might elect to or be forced to cut its distribution. In its latest quarter, the company paid out a distribution of $0.87 per share. That works out to around $3.72 billion in total cash distributions each quarter. With $6.27 billion in operating cash flows, the firm can keep the distribution as-is, but that's contingent on what management sees as a priority. Total capex in the first quarter was $7.1 billion, while cuts to planned spending will result in capex for the year of $23 billion. Given the significant size and the unknowns associated with Exxon, it's impossible to forecast roughly where cash flow should be for the current fiscal year, but if you annualize first quarter results, you end up with a reading of about $25.1 billion for 2020.
This disparity between cash flows and capex is small when you look at the quarterly distributions. Having said that, Exxon is a company focused still on growth. So long as operations can grow, the company can justify higher leverage. Already, net debt stands at $48.2 billion, but if growth does accompany spending then it shouldn't be an issue for this to rise. I personally would prefer that management slash the dividend and either pay down debt or grow faster, but at the end of the day, what happens will boil down to management's attitude on added leverage. Exxon can afford to pay the distribution as-is, but likely only if they truly want to.
Despite these tough times, management continues to do good things, both for shareholders and society more broadly. During the quarter, to offset dilution associated with shares used in compensation, the company repurchased 6 million shares for $305 million. This helps to prevent dilution for shareholders. For society, the company is making significant contributions aimed at combating the COVID-19 pandemic.
On the Chemical side of the business, the firm has recently added enough specialized polypropylene and isopropyl alcohol to help create 200 million masks or 20 million gowns, plus up to 50 million 4-ounce bottles of medical grade hand sanitizer. All of this is per month. Also, the firm’s initial production of hand sanitizer that it is donating has already reached 160,000 gallons. This is enough to produce 5 million 4-ounce bottles of the product. It is also working on helping to create reusable medical equipment, including an alternative to the N95 masks that medical providers are experiencing a massive shortage of.
During these tough times, every company in the energy space appears to be hurting. This is sad, but it also provides investors with attractive opportunities to buy for the long haul. Exxon, like its peers, has clearly been hit and it looks certain that the blow in the second quarter will end up being even more painful than the first. Having said that, the company still appears to be in a sound position and the most important thing investors can be doing is sitting and waiting for the inevitable recovery. It may not occur today. It may not even occur this year. But at some point in time, the market will turn around and Exxon will be standing as a quality prospect just like it has been in the past.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
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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