Should Investors Worry About Exxon Mobil’s Increasing Debt?
Much like the rest of the oil and gas industry, Exxon Mobil (NYSE:XOM), the US-based energy company, has been severely hit by the commodity slump over the last two years. The downturn, which led to a sharp drop in commodity price realizations globally, caused the integrated company’s revenue to decline by more than 35% in 2015. This forced the world’s largest publicly listed oil and gas company to cut down its 2016 capital spending budget to $23.2 billion, roughly 25% lower compared to the $31.1 billion spent in 2015. Further, Exxon’s operating cash flows began to deteriorate due to the persistently weak commodity prices, compelling the company to raise long-term debt to finance its capital expenditure.
Below, we show how Exxon Mobil’s long-term debt obligations have increased since the onset of the commodity trough in mid-2014. As on 30th June 2016, the company’s debt has grown to $29.5 billion, almost 2.5x of its debt at the end of 2014. Consequently, the integrated company’s debt-to-capital ratio has increased from merely 6% in 2014 to over 14% in the June quarter of 2016.
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On a standalone basis, the rise in debt is a large jump even for a company of Exxon’s size. However, when compared to its peers, the company’s debt position does not appear as daunting. For instance, the debt levels of Royal Dutch Shell and BP Plc. – two of Exxon’s closest rivals – rose to $79.5 billion and $50.6 billion respectively over the last few quarters, as opposed to Exxon’s debt of around $29.5 billion. In tandem, these companies witnessed a surge in their debt-to-capital ratio, much higher than Exxon.
That said, long-term obligation of around $30 billion is indeed large for any company. However, Exxon Mobil has remained resilient throughout the commodity down cycle on the back of its high quality reserves and excellent execution skills. As a result, the company continues to generate strong cash flows, enough to partly fund its operational and capital spending requirements for the year. For the first six months of 2016, the oil and gas company generated cash flows of $9.3 billion from its operations, versus $3.7 billion and $5.8 billion generated by Chevron and BP, respectively, during the same period.
To top it all, Exxon has maintained a credit rating of AAA even in the weak price environment. This implies that the company can leverage better credit terms if it chooses to refinance its existing debt, or raise new debt, in the coming quarters.
Source: Exxon Mobil’s Analyst Meeting 2016
Thus, we conclude that with high quality assets, outstanding execution, and a strong credit rating, there is not much reason for investors to worry about Exxon’s fundamental value. We have a price estimate of $93 per share for Exxon Mobil, which is roughly 6% higher than its current market price.
Have more questions about Exxon Mobil (NYSE:XOM)? See the links below:
- Exxon Mobil 2Q’16 Results: Are They As Bad As They Appear?
- Exxon Mobil To See A Notable Drop In Its 2Q’16 Earnings Despite Moderate Recovery In Commodity Prices
- Who Will Acquire InterOil? – ExxonMobil Or Oil Search
- What’s Exxon Mobil’s Revenue & Earnings Breakdown In Terms of Different Products?
- What’s Exxon Mobil’s Fundamental Value Based On Expected 2016 Results?
- How Has Exxon Mobil’s Revenue Composition Changed In The Last Five Years?
- What Has Led To More Than 30% Decline In Exxon Mobil’s Revenues & EBITDA In The Last Five Years?
- By What Percentage Can Exxon Mobil’s Revenues Grow Over the Next Five Years?
- Why Crude Oil & NGLs Operations Are 2x As Valuable As Refined Petroleum Products Operations For Exxon Mobil?
- Why Is Exxon Mobil’s Crude Oil & NGL’s EBITDA Margin Greater Than Its Refined Products EBITDA Margin?
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Exxon Mobil
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