Exxon Mobil Corporation: S&P Downgrade Highlights HUGE Problem for XOM Stock Holders

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Given the “lower for longer” price environment for crude oil, many investors in the oil patch have moved from smaller shale producers to the larger integrated majors. And you can’t get much bigger than Exxon Mobil Corporation (XOM).

S&P Downgrade Highlights HUGE Problem for Exxon's Stock Holders

XOM’s huge and diverse asset base, economies of scale, monstrous cash flows and juicy 3.4% dividend are just a few of the reasons why investors have fallen in love with the integrated major all over again.

Recently, that love affair with Exxon Mobil has been tested.

Poor earnings, big-time drops in revenues, a credit downgrade and now a less-than-expected dividend increase have all tested investors patience in recent weeks. With Exxon Mobil’s Friday earnings report looming, investors could be in for another round of heartbreak.

Exxon Mobil (XOM) Gets Bumped

Exxon’s troubles really began in the last quarter of 2015. It’s here where XOM felt the brunt in the decline of the price of oil. Before then, Exxon was still able to eek out an existence with refining taking over for its failing exploration and production operations. Last quarter, however, the adverse effects of the slowdown took hold.

Exxon managed to actually lose money on its E&P operations. In fact, the Texas gas giant actually lost more than $500 million on drilling and producing oil and natural gas. Meanwhile, refining wasn’t able to contribute as much as before. Revenues were down, as were cash flows. All in all, it was one of the worst quarters in Exxon’s recent history.

With that in mind, Standard & Poor’s put Exxon on CreditWatch negative back in February.

Well, with oil prices deteriorating more in the first chunk of the first quarter, S&P finally did the unthinkable — it cut Exxon Mobil’s credit rating. The ratings agency cut XOM’s credit score by two notches down to AA-plus. Exxon Mobil had been one of the last members of an exclusive club of firms with AAA or perfect credit scores. The remaining two are Johnson & Johnson (JNJ) and Microsoft Corporation (MSFT).

The problem S&P sees with Exxon isn’t just from the rout in oil prices, it’s that XOM might be playing fast and loose with its almighty dividend payment.

XOM Is Outspending Its Cash Flows

The crux of the downgrade was that Exxon Mobil has been too busy distributing cash via lucrative (and presumably safe) dividend payments and buyback programs.

Last quarter, Exxon had cash flows of just $5.1 billion, of which $785 million of them were due to asset sales. Exxon’s payment of about $3.6 billion in dividends and buybacks doesn’t leave much wiggle room to fund its huge capex spending or ongoing maintenance costs. In fact, looking at full-year cash flows, Exxon doesn’t have enough to cover dividends and buybacks while funding its already reduced capex programs.

Looking out further, the company spent a combined $325 billion on dividends and buybacks over the last 11 years. That amount is over 20% more than what Exxon outlaid on new property, plants and equipment.

As a result, cash balances are dwindling and net debt has doubled in recent years to $35 billion — a decade high. S&P questioned Exxon Mobil on why it would continue to pay such a lucrative dividend and not reduce debt, considering the current poor fundamentals of the energy industry.

The Dividend & Earnings

So faced with the downgrade, what did XOM do? It raised its payout. But before investor’s jump for joy and give S&P the proverbial finger, the increase didn’t exactly put a tiger in anyone’s tank.

XOM increased its quarterly payout to 75 cents per share — a 2 cent increase and only 3% overall. Even worse than missing analyst expectations was that this was the smallest increase since at least the first quarter of 2006. Back then, Exxon still managed to give investors at least a 10% bump.

The issue now, heading into earnings, is that things are going to be even worse. Oil prices today have only averaged down further during first quarter of the year. As a result, analysts are only expect XOM to earn a measly 31 cents per share and see reduced revenues and cash flows. This, plus the dividend bump, plays right into S&P’s concerns.

Bottom Line on XOM Stock

Still, Exxon has a lot of levers to pull to keep that dividend going — plenty of assets/treasury stock to sell, etc. But if the price of oil continues drifting sideways in the $35 to $45 per barrel range, XOM is going have to live beneath its means. And that could mean that the rich Exxon dividend (or at least increases to that dividend) could suffer.

This defeats one of major reason for buying the major in the first place.

The recent downgrade highlights a huge concern for Exxon Mobil stock — the fact that XOM continues to outspend on its dividend.

With its latest earnings report coming, we’ll get to see just how right Standard & Poor’s was on its call. Income investors may want bail on XOM if cash flows continue to show signs of deterioration.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/xom-exxon-mobil-stock-oil-prices/.

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