Will Exxon Mobil Be Able To Sustain Its Dividend For Long?

In times of uncertainty, investors are worried about the sustainability of their returns, both in the form of capital appreciation and regular dividends. Plummeting commodity prices over the last two years have uprooted the fundamentals of the oil and gas industry, causing the  majority of the companies to lose a significant portion of their market value. For instance, Exxon Mobil (NYSE:XOM), the world’s largest publicly traded oil and gas company, experienced a steep decline in its profitability as well as cash flows, owing to the softness in commodity prices. This caused its stock to drop from an all-time high of over $100 per share in July 2014 to less than $70 per share in August 2015. While the integrated company’s stock has recovered sharply over the last one year and currently trades at around $87 per share, the investor continues to be wary of the sustainability of their dividend because of the company’s diminishing cash flows.

Source: Google Finance

Exxon Mobil has a history of paying dividends for over a century now. It is considered to be an aristocrat company, since it has raised its dividend for at least 25 consecutive years in the past. In addition to paying regular dividends, the company has managed to grow its dividend at an average annual rate of 6.4% over the last 33 years. Furthermore, in the midst of the oil slump, Exxon increased its quarterly dividend by 6.7% in 2015, and 2.7% earlier this year, unlike most of its peers who have either maintained or reduced their dividends. Yet, Exxon’s dividend yield is much lower in comparison to its peers because of the industry’s dwindling profits.

Further, Exxon’s dividend payout ratio, which has hovered at around 20%-25% annually over the last decade, jumped to almost 75% between 2014 and 2015, because of the company’s lower earnings. Based on the company’s quarterly dividend of $0.75 per share, and our earning estimate for the year, Exxon’s dividend payout ratio is likely to surge to almost 120% by the end of 2016. This is an unreasonably high payout ratio to sustain, even for a company of Exxon’s size.

That said, Exxon is among the few oil and gas majors that are still generating profits and positive cash flows, while the rest of the industry is struggling to remain afloat in the worst ever commodity downturn. In the first half of 2016, Exxon generated cash flows of about $9.3 billion from its operations, which were sufficient to meet its dividend payments of around $6.2 billion. Given that the commodity prices have recovered somewhat in the third quarter compared to the first quarter of 2016, it would be reasonable to assume that the company would manage to generate similar cash flows in the later half of the year as well. This would mean that the dividend payments of $6.2 billion (assuming no dividend increase) in the second half of 2016 could be easily funded from the company’s cash flows from operations.

Exxon Mobil’s Cash Flow Summary for 1H’16

Source: Exxon Mobil 2Q’16 Presentation

In the worst case, if Exxon is unable to generate sufficient cash flows internally, it could use a combination of asset sale proceeds and new debt to pay out its dividend. The company has the strongest, and least leveraged balance sheet among the major integrated companies, which enables it to attract extremely low cost of debt. With an industry leading credit rating and cost of debt, Exxon is well placed to raise new debt and maintain its dividend payments. (Read: Should Investors Worry About Exxon Mobil’s Increasing Debt?)

Apart from this, Exxon has a strong portfolio of projects that will provide flexibility to add new production selectively, based on the recovery of commodity markets, and boost the company’s top line growth. Despite significant cuts in its capital budget for 2016 and 2017, the company expects almost 10 of its major projects to come online in the next few quarters, with a potential to contribute 450 thousand barrels of oil per day (KBOED) to Exxon’s existing production. This would mean that Exxon will be in a sweet spot to participate in the recovery in the commodity prices over the next couple of years.

Exxon Mobil’s Project Pipeline

Furthermore, Exxon has been successful in curbing its operating costs to maintain its margins in this slowdown. With the use of new and improved fracking technology, such as horizontal drilling, longer laterals, and more fracking stages, the company’s production costs have dropped notably. This has reduced the company’s break even price, making it economically viable for it to produce more even in a low price environment.

Thus, we believe that while Exxon’s current earnings are declining, its strong cash flows, less leveraged balance sheet, and potential asset sales could enable the company to sustain its dividend payments over the next few quarters, before the markets rebound. Further, Exxon’s robust pipeline of projects, and consistent efforts to reduce its operating costs will help to improve its margins, and, in turn, support a continuous stream of dividends for its shareholders.

Have more questions about Exxon Mobil (NYSE:XOM)? See the links below:

• Should Investors Worry About Exxon Mobil’s Increasing Debt?
• Why Will Exxon Mobil’s Upstream Operations Drive Its Value In The Future?
• How Will Exxon Mobil’s Revenue Move If Crude Oil Prices Average At $50 Per Barrel Until 2018?
• How Will Exxon Mobil’s Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
• How Will Exxon Mobil’s Production Progress In The Next Five Years?
• 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?

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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