Should Investors Worry About Exxon Mobil’s Increasing Debt?

+11.07%
Upside
115
Market
127
Trefis
XOM: Exxon Mobil logo
XOM
Exxon Mobil

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.

XOM-Q&A-10

Relevant Articles
  1. What’s Next For Exxon Mobil’s Stock After Rising 24% This Year?
  2. Rising 18% This Year, Will Exxon Mobil’s Run Continue Following Q2 Results?
  3. Is Chevron A Better Integrated Oil Major Pick Over Exxon Mobil?
  4. Rising 21% This Year, What Lies Ahead For Exxon Stock Following Q1 Earnings?
  5. Down 9% Since The Beginning of 2023, What Should You Expect From Exxon Mobil Stock?
  6. Will Exxon Mobil Stock Trade Higher Post Q2?

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.

XOM-Q&A-10-1

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.

XOM-Q&A-10-2

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:

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

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research