When I last wrote about Exxon Mobil (NYSE:XOM) stock, I was optimistic shares would rally if crude oil prices regained lost ground. However, the recovery is taking longer than expected. In the meantime, as I explained in my last article, the company has made several surprising steps during the novel coronavirus pandemic that are weighing down Exxon Mobil stock.
At a time when most companies are slashing capex and operating costs, Exxon went a different route. Having an aggressive expansion strategy is not a big issue if demand is up. Unfortunately, that is where things went pear-shaped for the oil and gas giant.
Exxon also remains firmly committed to ensuring its high dividend payouts, which are putting a real dent on its cash reserves. In detailing its latest quarterly results, management revealed it would cut capex and operating costs by a significant margin to preserve its dividend. While the cuts are welcome, its tough to understand why the company feels its payouts are set in stone.
What’s even more puzzling is that previously the management felt it could take advantage of the crisis to continue expanding so that it would be in better shape to exploit growth opportunities once the crisis was over. However, now it seems that the mindset has changed.
As shares continue to tumble, there has to be a long-term play that investors can believe in. Until then, Exxon Mobil is not a buy.
Exxon Mobil Stock Punished Due to Bad Decisions
Year-to-date, Exxon Mobil stock is down almost 41%, and there’s no sign of the bleeding to let up. As mentioned in my intro, the issues with the stock are down to management’s unusual approach in handling this crisis. We all know that the oil industry is going through a rough patch. The pandemic has been particularly brutal on this sector, with the Global X MLP & Energy Infrastructure ETF (NYSEARCA:MLPX) down almost 29%.
But when you look at Exxon’s peers, such as Chevron (NYSE:CVX), down almost 21% during the same period, it seems the company has had it particularly bad. You can put that down to the market reacting to strange management moves.
Whether one likes to acknowledge it or not, the stock market operates in a very democratic fashion. If you have a solid board of directors in place and a great strategy to push the company forward, then the markets will reward you in kind. I believe that’s where Exxon is struggling.
Two oil companies are on the list of dividend aristocrats – S&P 500 constituents who consistently increased dividend payouts for 25 consecutive years or more. Those two happen to be Chevron and Exxon Mobil. Granted, it’s a great title. But there comes a time when you have to ask yourself if holding it is worth burning so much cash.
There’s also the issue of skyrocketing debt. At the end of last year, total debt stood at $26.3 billion for Exxon. At the end of the latest quarter, that figure had ballooned to $46.6 billion. However, cash in hand stood at $12.6 billion on June 30. What gives? If the company took out $20.2 billion of new debt, it should have better cash reserves. Well, you can chalk that down to its dividend payments and cash burn.
Waiting on the World to Change
At this point, Exxon management is asking investors to wait it out. The energy company’s debt-to-equity ratio has skyrocketed over the last six months. Every major oil company has taken out debt to finance operations amid the pandemic. However, Exxon has an insatiable appetite for debt. Investors would be concerned if this becomes the go-to source for the company to finance its operations before things normalize.
Originally, Exxon intended to spend $33 billion on capex in 2020. But Covid-19 led to a roughly 30% cut to those plans. The company also cut cash operating expenses by 15%. These are massive but understandable reductions. However, the key here is that previously the company wanted to march along and layout an aggressive expansion strategy. It would help the company outpace the competition when prices would return to pre-pandemic levels. As it stands at the moment, it seems management feels that idea is a bit far fetched.
Considering the sluggishness that we’ve seen in the oil markets, I would agree with that sentiment. But what does that mean for Exxon Mobil shareholders? Well, it means the company wants them to wait it out. Since there is no clear timeline as to when oil prices will return to normal, investors will have to park their capital for a long time before seeing capital appreciation. Unfortunately, there are more enticing stocks in the market at this time, and you cannot expect shareholders to wait forever for things to change.
My Final Word
The oil and gas sector is already facing long-term headwinds from renewables. Covid-19 has added to the pain, and energy companies had to scramble to find their solutions to the crisis. As I mentioned in my previous piece, Exxon had a particularly novel way of tackling the fallout from the virus.
Unfortunately, the company has retreated on its stance and not for a good reason. Retail investors – an individual who buys securities for his or her personal use – represent 70% of Exxon’s shareholders, and that’s who the company wants to keep happy at this time. However, even they will eventually realize that the plump dividend they are getting will be unsustainable if Exxon does not have a long-term strategy. That’s why it becomes challenging to argue in favor of buying more Exxon Mobil stock at the moment.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. At this writing, Faizan Farooque does not directly own the securities mentioned above.