The mighty Exxon Mobil Corporation (XOM) is once again slashing investments to save cash, and investors in XOM stock shouldn’t want it any other way.
Like the rest of the industry, Exxon Mobil is cutting way back on capital expenditures. On Wednesday, XOM said this year’s capital spending will likely come to only $23 billion. That’s nearly a quarter less than it spent last year thanks to the ongoing rout in prices for oil and natural gas.
And this is exactly what XOM should be doing.
There’s no reason to find and produce more oil when there’s a supply glut. (Duh.) And it’s not like Exxon Mobil has to keep pumping because its loaded up with debt. It’s not some upstart fracker that’s freaking out the junk bond market.
Most importantly, it reassures investors that the dividend and share repurchase program are safe. If you want to alienate your investor base, messing with cash in their pockets is a great way to do it.
Look at what happened when ConocoPhillips (COP) slashed its dividend by 66% a month ago. Analysts and investors were shocked and stunned. Research shops have been telling their clients that maintaining the dividend was COP’s top priority.
Hell, COP hadn’t reduced its dividend for 23 consecutive years.
XOM Stock Is at the Mercy of Crude Prices
That put equity income investors on notice. This slump in oil prices shows no sign of abating, and that stresses every company’s cash situation, even if they are in the Dow Jones Industrial Average like Exxon Mobil.
XOM by no means faces liquidity concerns. It’s merely staying in front of the problem. After all, free cash flow went negative last year.
Indeed, in 2014, Exxon Mobil spent $11.57 billion on dividends and $13.18 billion buying back XOM stock, and it still generated free cash flow of nearly $4 billion after paying interest on debt. The company spent the same amount on dividends last year, but reduced buybacks to $4 billion and free cash flow was negative by a little over $2 billion.
Naturally, the balance sheet is showing signs of wear and tear, too. In 2011, Exxon Mobil claimed almost $13 billion in cash and short-term investments. Two years later, it was down to $4.6 billion. And then at the end of 2015, XOM had $3.7 billion on the books.
So if anyone is wringing their hands that even an oil major like Exxon Mobil is worried about cash, ask them where have they been? Every company in this sector has too. Crude oil hasn’t sold for more than 80 bucks a barrel since 2014.
The company’s cut to capital spending doesn’t change the story on the XOM stock price. The market knew this was coming.
What XOM stock and every other energy sector name needs is relief from the oil market. Capex is a sideshow.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
