In this clip from the Industry Focus: Energy podcast, Sean O'Reilly and Taylor Muckerman take a look at two listener questions. Find out whether or not investors might expect to see a dividend cut or stock buyback program from ExxonMobil (XOM -0.85%) anytime soon, how much slashed exploration budgets will eventually affect pipeline companies, and more.
A full transcript follows the video.
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This podcast was recorded on Aug. 18, 2016.
Sean O'Reilly: Leland Payne, out there in Fairview, Texas, wrote us in and says, "Sean and Taylor, on Friday, my friends over at CNBC talked a lot about the potential that ExxonMobil, Chevron (CVX -0.80%), etc., could cut their dividends, if WTI went below $40 and stayed below $50 the rest of this year and next year. The point was made that XOM could more easily increase its debt to maintain the dividend, but my question is: Couldn't they sell some stock they could have bought back in the past year to keep paying the dividends as well? According to Reuters, XOM purchased $210 billion of stock in the decade ending December 31, 2015."
Basically, should Exxon just sell some of its stock on the open market, then it's bought back and it's probably just sitting there in the Treasury stock portion of the balance sheet, or should they take on debt? Should they cut the dividend?
Taylor Muckerman: I definitely don't see a dividend cut in the future. You saw [Conoco]Phillips (COP -0.71%) cut their dividend earlier this year by 75%, I believe. For the most part, the other majors are standing pat. I don't see Exxon cutting its dividend. I don't know if they would sell back shares to the market, because buying back shares has been their thing for so long.
O'Reilly: Buying back shares and the dividend is their thing.
Muckerman: Right. That is their thing.
O'Reilly: Arguably, it's more their thing than producing oil.
Muckerman: In the last couple of years, yes. Their reserve replacement ratio has not been all there.
O'Reilly: What did they hit, 60 or 70 last year?
Muckerman: I don't remember what it was last year. Their long-term average is over 100, but the last couple of years not so much. You look at them, their solvency ratios aren't terrible. Debt to equity is 25%. EBIT to their interest expense is 21 times. They can clearly take on a little bit more debt if they need to, which I think would be their method, because when you look at this company, they're very highly rated in the debt markets, so they can get that cheap interest rate, cheaper than pretty much everybody else in the business.
O'Reilly: Cost of capital obviously for debt is way lower than equity, so they should go that route, if they were doing anything.
Muckerman: If you sell equity, you're diluting your shareholders, which is the exact opposite of shareholder return, and those two methods -- like we just talked about -- have been pretty much the entire shareholder return portfolio from Exxon in the last few years. You remove that and you'll lose some shareholder trust.
O'Reilly: You got a tweet.
Muckerman: I did. I did get a tweet.
O'Reilly: Do you want to read it or should I?
Muckerman: I don't have it up on my computer so go for it.
O'Reilly: Ben Thomas tweeted at your friend and mine, Taylor Muckerman, on August 8, @TMuckerman. Question: "With oil companies cutting exploration budgets, how will this eventually affect contract-driven midstream companies?" You and Crowe, man, you guys were all about the fee-based pipeline guys, but that's not always the case with some of them. Is this going to eventually affect that? Because the production in a field that a pipeline is close to starts dropping...
Muckerman: It's a question I've definitely wrestled with myself, because I'm an investor in Spectra Energy. I believe that's the only pipeline company I'm invested in. No, actually Sunoco [Logistics Partners]. I think that could certainly become a problem down the line. You want to be invested in the pipeline that has access to the major fields. They would probably be the last to witness a downturn in production like the Eagle Ford, the Permian. You want access to natural gas demand centers like the Northeast.
O'Reilly: Avoid pipelines that are in the midcontinent.
Muckerman: You can argue that, but again that's where a lot of the refiners are. I think you're quite a ways away from having to worry about a shortage of oil and natural gas being transported, especially natural gas, which, again, Spectra is mostly natural gas. Maybe, I think oil pipelines -- you might have a little bit bigger of a worry sooner, but I certainly don't think that that's anytime within the next five to 10 years, just because there is so much potential that we can flip the switch pretty easily. We just talked about last week EOG, Pioneer Natural Resources, and Continental talking about 10-15% production growth.
O'Reilly: At $50 for the next five years.
Muckerman: Yeah. Those are three of the biggest names in the shale oil business, EOG being the largest in the U.S. shale oil business. I'm not too worried about the continental U.S. production waning to the point where continental U.S. pipelines are really feeling the pinch.