These are rough days in the oil patch and Exxon Mobil (NYSE:XOM), the largest domestic oil company, proves as much. A member of the Dow Jones Industrial Average, Exxon Mobil stock is lower by 37.16% year-to-date, embodying the energy sector’s status as one of the worst-performing groups in the S&P 500 in 2020.
Somewhat remarkably, Exxon is mostly flat to start August after reporting a second-quarter loss of 70 cents a share on revenue of $32.61 billion. Analysts expected a loss of 61 cents on sales of $38.16 billion.
Indications of recent steadiness in this stock should not be construed as a buy signal. If anything, investors ought to be concerned that XOM stock is basically treading water as oil prices resided around five-month highs, helped by a weakening U.S. dollar.
Speaking of oil prices, the recovery hasn’t been sharp enough to prevent Exxon from issuing some gloomy commentary. In a recent regulatory filing, the oil major said that if prices don’t rally some more – it didn’t say by how much – before the end of 2020, it could be forced to write-off 20% of output, or the equivalent of 4.5 billion barrels of crude.
Exxon didn’t identify specific regions in which that production wipe out could come, but it’s clear its Imperial Oil unit in Canada is likely to be part of that scenario, should it come to pass. As it is, Exxon already tossed 1 billion barrels off its balance sheet as a result of low prices.
Exxon Mobil Stock Has a Fragile Dividend
Consume enough news about Exxon these days and you’re bound to hear something about the dividend. As of Aug. 6, the stock yields 7.94%. That’s extraordinarily high for what was once a quality company. Putting Exxon’s yield into context, it’s nearly double the yields on the Dow and S&P 500 combined.
Management is committed to defending the payout, meaning that, barring unforeseen disaster, it probably won’t be cut this year. However, its multi-decade streak of increases is almost certainly off the table, meaning Exxon’s dividend aristocrats status is out the door.
Exxon management is sending a signal that the payout is sacrosanct, but this defense is coming at a heavy cost. For example, spending cuts could reach $23 billion this year. Alright, investors can probably live with that in low oil price climate, but those reductions weigh on any producer’s ability to adequately capitalize when prices rebound.
Second, Exxon’s debt increased to $10 billion in June quarter while the company generated just $1.5 billion in operating cash flow against negative free cash flow of $5.1 billion. All of those numbers are concerning. Yes, interest rates are low, but Exxon is selling debt to defend its dividend, something a slew of this year’s dividend offenders did in previous years.
Said another way, dividend payers funding the payout with debt are more susceptible to cuts or suspensions down the road than companies delivering shareholder rewards via free cash.
Two more optical issues to consider with the Exxon dividend. First, reports surfaced on Aug. 6 that the company will cease contributing to employees’ 401(k) plans to conserve cash for the dividend. Second, rival BP (NYSE:BP), viewed as the architect of the oil supermajor structure, is slashing its payout. That doesn’t mean Exxon will follow suit, but suffice to say, it’s not an encouraging sign for the fate of dividends in the broader energy patch.
Not Enough Catalysts
The bottom line on Exxon Mobil stock is that it lacks for positive catalysts. Spending cuts and dividend defense are usually applauded by Wall Street, but a growing debt burden could undo much of that good work. The proof is in the price action pudding as the stock has done a whole lot of nothing in the days since the company said it’s prioritizing the payout.
Additionally, the oil demand outlook is troublesome. It could be multiple years before the airline industry – a key end market for oil producers – gets back to its 2019 self. Even if that timeline is sped up, there’s an imminent risk of increasing adoption of and declining costs for renewable energy sources.
It’s no wonder that some experts argue that oil demand will never again resemble 2019 levels, making Exxon and its ilk too risky for long-term investors.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
