Negative interest rates in Europe over the past few years were weird enough. But negative crude oil prices? That really takes the strangeness to a whole new level. The sweet, light crude oil futures contract for May delivery dropped to a previously unimaginable low of negative $40 per barrel recently. It remains to be seen how low the June and July contracts trade. But it’s safe to say that world has a lot more oil than it can reasonably use right now, and that’s not going to change overnight. This raises questions about Exxon Mobil (NYSE:XOM). Exxon Mobile stock is the largest and arguably highest-quality blue chip in the energy sector.
As recently as 2011, ExxonMobil was the largest company in the world by market cap. Today, it doesn’t make the top 20 and is smaller than Netflix (NASDAQ:NFLX).
It’s a strange point in history when the largest non-state-owned oil company in the world sports a lower market capitalization than a streaming video company. But that’s the situation today.
How the Mighty Have Fallen
Exxon Mobil stock hit its all-time high in 2014, benefiting from a steadily growing global economy. But that all ground to a halt due to the success of American nonconventional drilling.
As fracking transformed the United States into the world’s biggest energy producer, we got our first real supply glut in years. And more than five years later, the situation has only gotten worse, reaching the crisis point we’re in today. The one-two punch of falling demand due to the coronavirus lockdowns and surging supply due to Saudi Arabia’s decision to flood the market has created the toughest operating environment for Exxon in its entire history.
As a result, Exxon Mobil stock trades today at prices first seen in 2000, fully two decades ago.
The collapse in the share price has sent the dividend yield soaring to levels I never expected to see in my lifetime. As I write this, Exxon Mobil’s yield was around 8%.
When you see a yield that high, you have to ask: is the dividend safe?
Exxon Mobil Stock’s Dividend
In the case of Exxon Mobil stock, the answer is yes … at least for now. Exxon’s earnings have not consistently covered its dividend over the past five years (a dividend payout ratio higher than 1 means that dividend payments are higher than earnings). Large energy companies like Exxon Mobil generate a lot of non-cash expenses like depreciation.
But even looking at free cash flow (which strips out depreciation and other non-cash expenses but includes cash outlays for capital spending) the story doesn’t get a lot better. Dividend coverage based on free cash flow has been thin since 2013 and went negative last year due in part to higher capital expenditures… expenditures that Exxon Mobil no doubt wishes it hadn’t made given today’s pricing environment.
The company has ample capacity to borrow, as its debt/equity ratio is a modest 0.25. So the dividend should be safe for now. But its long-term safety and growth depend on things turning around. And that’s not looking particularly likely at the moment.
Exxon’s revenues per share have been in free fall since 2014, which by no coincidence is also the year when Exxon slowed down on its stock buybacks. With the share count (the denominator) no longer falling as quickly, deterioration in revenues can’t be as easily ignored.
Exxon Mobil’s short-term outlook is bleak. Low crude oil prices alone wouldn’t necessarily be catastrophic if gasoline sales were strong. But gasoline sales are all but nonexistent during the coronavirus lockdowns and won’t fully recover for months.
Longer term, they may never fully recover. Fossil fuels will be with us for decades, possibly forever. But green energy is becoming an ever-bigger piece of the pie, and that’s not likely to change any time soon.
So, while ExxonMobil stock is cheap, it’s by no means a slam dunk, even at these prices.
As of this writing, Charles Sizemore did not hold a position in any of the aforementioned securities.