There is not any option to sugarcoat it: Oil big ExxonMobil (NYSE: XOM) has had a really, very unhealthy yr. Shares are down greater than 35% yr up to now.
After all, the previous couple of years have not been all that nice for the corporate, both: ExxonMobil’s stock has misplaced greater than 45% of its value over the previous three years. In truth, ExxonMobil’s shares have not been this low since 2004.
Is it time to purchase?
Picture supply: Getty Pictures.
Oil or turmoil
To be truthful, ExxonMobil is not the one oil firm that has been bruised by 2020. Practically each firm within the business took an enormous hit in early March after an oil price battle broke out between Saudi Arabia and Russia, slicing crude costs virtually in half. When the coronavirus pandemic exploded in mid-March, demand for gas dried up, leaving the world awash in low-cost oil that no person was utilizing.
Oil costs have since recovered considerably. Worldwide benchmark Brent Crude and U.S. benchmark WTI Crude have stayed above $40/barrel for nearly your entire month of July. That is nonetheless a far cry from January’s excessive of greater than $60/barrel, however issues are shifting in the precise path, not less than.
ExxonMobil can profitably pump oil from a few of its fields at these costs. For instance, its large offshore Guyana progress play ought to be capable to flip a revenue at $40/barrel Brent Crude. Nevertheless, different parts of its portfolio aren’t almost as viable. The corporate hasn’t launched an official quantity, however some analysts imagine ExxonMobil may wish oil costs as excessive as $75/barrel to interrupt even.
Contemplating oil costs have solely briefly surpassed that degree as soon as within the final 5 years (in mid-2018), ExxonMobil may not be headed for profitability anytime quickly.
Earn or burn
It is attainable that low oil costs might stick round for months if not years. Can Exxon?
Briefly: sure, in all probability.
ExxonMobil has reduce $10 billion, about 30%, from its 2020 capital funds and has made a further 15% reduce to its working bills as properly. These strikes, coupled with the corporate’s measurement — it is nonetheless the most important oil firm on this planet by market cap, at $184.5 billion — ought to be sufficient to make sure it might probably climate the present financial downturn with out going beneath.
After all, “not going beneath” could be very completely different from “outperforming.” It is powerful to see how ExxonMobil — or any oil firm, for that matter — can thrive in a world the place there’s a lot oil oversupply. Even with main OPEC+ manufacturing cuts, agreed to in April, crude costs aren’t anyplace near ranges wanted to make sure continued profitability. And people OPEC+ manufacturing ranges are topic to vary at just about any time.
Nevertheless, there’s one other potential argument for purchasing ExxonMobil. It is a Dividend Aristocrat that has raised its payout yearly for the final 37 years. With a present yield of about 8%, the corporate might be a sensible choice for dividend traders…if that yield sticks round.
Payout or keep out
ExxonMobil’s dividend at the moment prices the corporate about $15 billion per yr. In the meantime, its free cash circulation has plummeted over the previous yr, to solely about $2.5 billion. That, mixed with the corporate’s present $11.four billion cash hoard, would not even cowl a yr of dividend funds. That leaves taking up extra debt as one of many solely avenues to fund the dividend.
Peer oil main Royal Dutch Shell bit the bullet and reduce its dividend in April, however there are indicators that ExxonMobil is not going to go that route. Its aforementioned measurement and its stability sheet — strengthened by years of conservative fiscal administration — have put it ready to lift debt on favorable phrases. Certainly, regardless of latest rankings downgrades from S&P International and Moody’s, ExxonMobil’s debt continues to be rated high-grade, at Aa1/AA. Its present long-term debt load of $59.6 billion is simply 1.three instances earnings earlier than curiosity, taxation, depreciation, and amortization (EBITDA), one of many lowest of the oil majors, so it has some wiggle room on its stability sheet.
The most important signal, although, that ExxonMobil is not going to jeopardize its Dividend Aristocrat standing by slicing its payout got here from CEO Darren Woods on the first-quarter 2020 earnings name. “[I]f you have a look at our shareholder base, about 70% of them are retail or long-term traders that search for our dividend and see that as an necessary supply of stability of their earnings,” he mentioned. “And so now we have a powerful dedication to that.”
Translation: ExxonMobil is not prone to reduce its dividend…however that is no assure that it will not if the oil markets quickly deteriorate.
Purchase or bye
It is powerful to name ExxonMobil a purchase proper now. The corporate is a long-term underperformer in a risky business weathering unprecedented challenges. It is not likely clear how the corporate might return to constant outperformance anytime quickly.
ExxonMobil’s dividend is much less dangerous than many different oil stocks’, and its yield is much larger than many different Dividend Aristocrats’. Oil costs appear to have — for now — stabilized to the purpose that an imminent dividend reduce is unlikely. Dividend traders who’ve reasonable danger tolerance may think about shopping for in for that motive. Most traders, although, will discover higher alternatives elsewhere within the vitality sector.
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John Bromels has no place in any of the stocks talked about. The Motley Idiot owns shares of and recommends Moody’s. The Motley Idiot has a disclosure coverage.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.
