The stock market is getting impatient with ExxonMobil (NYSE:XOM).
Fellow oil majors Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), Total SA (NYSE:TOT), and Chevron (NYSE:CVX) have all released plans to sharply reduce 2020 capital spending in the wake of the oil price crash. In response, the market sent their shares soaring. Over the week between March 19 and 25, their share prices rose between 25.8% (Chevron) and 68.8% (Shell's Class A Shares). Exxon, on the other hand, saw shares rise just 12% during that period.
Here's why Exxon's in a risky spot, and why that could cause problems for its dividend.
To cut or not to cut
Before oil prices collapsed in early March, all of the oil majors were planning to increase capital spending in 2020 over their 2019 levels. Exxon, which has struggled in recent years with declining production, was particularly keen to spend. Speaking at ExxonMobil's annual investor day on March 5, CEO Darren Woods announced that the company would be "leaning into this market when others have pulled back," to the tune of $30 billion to $35 billion in annual spending. That almost certainly would have involved outspending the company's cash flow at times.
Investors didn't think much of that idea, and the company's shares have fallen more than 25% since March 5. On March 16, S&P Global downgraded Exxon's credit rating from AA+ to AA: still investment-grade, but a signal of the market's discomfort with the prospect of rising debt. Almost immediately, Exxon put out a press release vowing to look into "all appropriate steps to significantly reduce capital and operating expenses in the near term."
That announcement seemed to slow the pace of the company's share-price decline. But more than a week later, Exxon is still being coy about exactly what cuts -- if any -- it plans to make.
The market hates uncertainty
The only thing that's going to reassure the market is a concrete plan of action, but Exxon's oil major peers have set the bar pretty high by announcing spending cuts of around 20% each. Shell is cutting an estimated $8 billion to $9 billion in capital and operating expenses in 2020; Chevron similarly promised a $5 billion reduction in spending; Total is cutting $800 million. In addition, Shell and Chevron have suspended their share buyback programs, which ate up billions of dollars of cash flow in 2019.
So, anything less than a 20% reduction in capital spending will probably be seen by the market as a disappointment, and is likely to lead to a share price decline. However, Woods is clearly eager to follow the time-tested Exxon playbook of spending money throughout the cycle, regardless of oil prices. That's been a winning strategy for the company in the past, which makes it uncertain how much cutting Woods will be willing to do. In all likelihood, he's going to try to gauge exactly how much (or how little) he needs to cut to satisfy the market and announce only that much and nothing else.
How much would satisfy the market? Well, Exxon spent $31.1 billion in capital and exploration in 2019, which was a 20% increase from 2018's $25.9 billion. So a 20% cut would be roughly $6 billion.
Enough to save the dividend
Would cutting just $6 billion from its capital budget be enough to secure Exxon's dividend?
The company paid out $14.7 billion in dividends in 2019. Together with the $31.1 billion in capital and exploration, that totaled $45.8 billion. However, the company only brought in $29.7 billion in operating cash flow, $16.1 billion less than those two expense categories. It made up the difference primarily through $3.7 billion in asset sales and an $8.7 billion increase in net debt.
So, even a $6 billion reduction in capital expenditures would still leave Exxon -- assuming oil prices were comparable to last year's -- with a $10 billion hole to fill. And, of course, oil prices today are much lower than they were at any time during 2019, which means that hole is likely to be much larger than $10 billion. The company's current cash on hand of $3.1 billion won't be much help here.
However, Exxon's current debt load of $45.3 billion, although record high for the company, equates to less than 1.1 times EBITDA, which is on the low end of its peer group (only Chevron's debt-to-EBITDA ratio of 0.9 is lower). Despite its recent credit downgrade, it maintains a rating of Aaa/AA, which is still very high. The company would likely have no problem securing financing to maintain its dividend.
What investors should expect
Exxon is going to have to come clean about its specific 2020 spending plans -- and sooner rather than later. If it comes out with anything less than a 20% reduction in capital spending, the market is likely to punish the stock. On the other hand, in the unlikely event the company surprises with, say, a spending cut of $10 billion (about 27%) or more, investors will probably send shares upward.
That said, moves that placate the market -- which can pay off in the short term -- may not be the best long-term strategy, for Exxon right now or for companies in general.
Either way, ExxonMobil seems likely to continue to maintain its status as a Dividend Aristocrat, provided the current economic situation doesn't drag on for too many months. If it does, ExxonMobil -- and the oil industry in general -- will have bigger problems than just a potential dividend cut.