Is Exxon’s Dividend Too High to Be Justified?


The energy sector has been the best performer in recent weeks, with WTI crude prices reaching their highest level in nearly eight months thanks to a wave of potential vaccines against Covid-19. Optimism has returned to the oil markets. Same conservative BP Plc (NYSE: BP) reversed its earlier forecast that we could have passed peak oil, with the company now saying demand for oil may not peak until 2030.

Yet Big Oil is still a long way from being out of the woods, with the big dividend payers, in particular, remaining in a precarious position.

With WTI trading at ~ $ 45, according to Raymond analyst James Pavel Molchanov ExxonMobil (NYSE: XOM) still does not provide enough cash to fund its dividend and faces an “unenviable choice” to sell assets or take more leverage to support the dividend.

Last month, Exxon announced it would keep its dividend at 87 cents per quarter, giving the company an insanely high payout of 11%.

However, that yield has now fallen to 8.7% after XOM stock climbed 23% in the past month.

Big decisions

Exxon faces big decisions on dividend tradeoffs.

The company is still draining cash at current oil prices, needing a WTI crude price of ~ $ 50 / bb to be able to handle its generous payout and continue spending level d investments. maintenance from operating cash flow.

Exxon needs around $ 8 billion in debt financing to maintain the current dividend level in 2021. However, Molchanov says that giving up assets at potentially sub-optimal valuations is the most likely short-term solution but not. viable.

During his last call on income, Exxon has revealed that it is in advanced talks on several potential divestments. Previously, the company said it has lined up $ 15 billion in potential divestments and is also evaluating the sale of North American dry gas assets for a combined book value of up to $ 30 billion. If successful, divestments would be among the largest write-downs on record in the oil industry.

Related: Climate Goals Could Cut Natural Gas Investments By $ 1 trillion

Fortunately for Exxon, the company can still borrow at attractive rates. However, he reiterated during the call for results that he did not plan to take on more debt.

Raymond analyst James Pavel Molchanov told clients in a note on Friday, as reported MarketWatch, that Exxon has three ways to avoid its first dividend hiatus in decades in what it called an “unenviable choice.”

  1. Breaking his promise not to take on more debt, which Molchanov called “doable” but bad for credibility.
  2. Sell ​​assets at prices that shareholders won’t appreciate, but that would support dividend payouts – a choice Molchanov described as “most likely” but unsustainable in the long run.
  3. Cut dividends, which the analyst described as a “sweeping approach” that probably wouldn’t happen for at least a year.

Either way, Molchanov currently has an equivalent “sell” rating on Exxon. And he is not alone.

Wall Street turns positive on energy

After years of undermining the industry, Wall Street is becoming increasingly positive on the energy front, with a growing number of analysts expressing optimism that the worst could be in the rearview mirror.

Bank of America is the latest to join the bull camp and believes Covid-19 vaccines will help bring oil demand back to normal levels within months.

BofA analyst Doug Leggate has predicted that many oil and gas stocks will see a significant rise in 2021 if Brent prices manage to climb back to $ 55 a barrel or more. Brent crude was trading at $ 70 in January before the pandemic caused the biggest demand destruction in history.

BofA is overweight the energy sector and has advised investors to focus on three types of stocks:

  • Leveraged oil stocks with bullish catalysts ahead, for example Apache Corp. (NYSE: APA) et Hess Corp. (NYSE: HES)
  • Oil stocks that pay large dividends, e.g. ExxonMobil, Chevron Corp. (NYSE: CVX) et ConocoPhillips (NYSE: COP)
  • Oil companies with the potential to increase their free cash flow through consolidations or other cost reduction measures, for example, Pioneer natural resources (NYSEPXD), EOG Resources (NYSE: EOG) et Devon Energy (NYSE: DVN)

The medium-term outlook has improved dramatically after news was announced that OPEC and its Russian-led partners would likely extend oil production cuts for another two to three months in a bid to keep markets tight and encourage a new recovery in oil prices.

OPEC is due to meet on Monday to define its production strategy before meeting with a Russian-led producer group on Tuesday. OPEC + appears to have learned its lesson and members will largely have to cooperate if the organization agrees to expand production cuts.

By Alex Kimani for OilUSD

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