Better late than never!
After dithering for a few weeks, oil giant ExxonMobil (NYSE:XOM) finally announced that it was going to cut its 2020 capital spending levels and operational expenses. With this decision, it joins fellow oil majors Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B), Chevron (NYSE:CVX), and Total (NYSE:TOT) in taking action to preserve cash for its dividend payments.
It's a detailed plan, but will it be enough? Here's what dividend investors need to know.
A man with a plan
ExxonMobil CEO Darren Woods was a late convert to the cost-cutting party. In fact, he originally had exactly the opposite planned for 2020, promising big increases in capital spending. At the company's investor day on March 5, he announced that ExxonMobil would "use the strength of our balance sheet to invest through the cycle."
Ordinarily, that wouldn't be a bad strategy. ExxonMobil has a strong balance sheet and a good credit rating, and when times are tough, other companies that are feeling the pinch can sometimes be willing to sell assets at a steep discount. However, a day after Woods announced this plan, the OPEC+ alliance failed to reach an agreement on production limits, and oil prices fell by almost 50% to around $25 per barrel. Because none of the oil majors would be able to profitably produce oil at those prices, investors got concerned about potential dividend cuts.
Many of Exxon's peers -- also with solid balance sheets and credit ratings -- quickly announced 2020 spending cuts to reassure investors that their dividends would be safe. Shell and Total each announced cuts to their 2020 capital spending on March 23, while Chevron projected its own 20% cut on March 25. Total and Shell also suspended their share-buyback programs.
Woods dragged his feet, though. Although Exxon released a statement claiming it was "considering" such cuts, it wasn't specific, and management didn't commit to a particular strategy. Observers wondered whether Woods was considering a "damn the torpedoes; full speed ahead" spending plan, which would almost certainly have resulted in a backlash from investors.
Ultimately, though, Woods seems to have seen the light, releasing a detailed response on April 7. However, there are signs he hasn't totally abandoned his original ambitions.
Goodbye, Texas; hello, Guyana
Exxon's cost reductions include a 30% cut in 2020 capital spending to about $23 billion. It also plans to reduce operating expenses by about 15%. Like many other producers, Exxon has decided that the largest share of the cuts will come from Texas' Permian Basin. A final investment decision on an offshore opportunity in Mozambique has also been delayed.
On the other hand, Exxon's promising deepwater drilling operations offshore Guyana, on the northern coast of South America, are largely moving ahead as planned. Some additional developments may be delayed for six to 12 months as the company waits for government approval to add a third production vessel at its Payara field. Deepwater drilling has higher up-front exploration costs than shale drilling, but once wells are installed, they have longer lifespans and fewer associated expenses than the constant churn of onshore shale wells.
The 30% cut to 2020 capex is surprisingly large, considering Chevron, Shell, and Total only announced capital spending cuts of about 20%. However, Woods doesn't seem to have completely abandoned his spending ambitions. In the statement announcing the 2020 cuts, Woods noted (emphasis added):
The long-term fundamentals that underpin the company's business plans have not changed -- population and energy demand will grow, and the economy will rebound. Our capital allocation priorities also remain unchanged. Our objective is to continue investing in industry-advantaged projects to create value, preserve cash for the dividend and make appropriate and prudent use of our balance sheet.
Enough to save the dividend
In the short term, Exxon's ability to pay its dividend was never really in doubt. The company has a strong credit rating and a sturdy enough balance sheet to weather several months of reduced oil prices without putting its long-term financial health in jeopardy. With a 30% cut in capital spending, ExxonMobil will be able to devote significantly more cash to help fund its dividend.
Luckily for Exxon -- and for oil companies in general -- OPEC+ recently agreed to cut production by 9.7 million barrels/day. While that won't be enough to offset the coronavirus-triggered lack of demand, recent news reports seem to suggest that the pandemic may be peaking earlier than expected. If that's indeed the case, global travel bans -- one cause of the drop in demand for oil-based fuels -- may be lifted sooner rather than later.
These conditions could change at a moment's notice, of course, but for now Exxon looks almost certain to continue its 37-year streak of annual dividend increases.
Woods seems to have successfully threaded the needle. He's placating the markets by cutting expenses in the short term, while recommitting to his long-term strategy for the company. That's actually a good thing: Investors shouldn't want a CEO to change the company's long-term strategy just for the sake of juicing the share price over the short term.
If conditions change significantly -- say, if COVID-19 makes a resurgence, or if the new oil production limits fall apart again -- then investors should probably reexamine the company's prospects. For now, though, Exxon looks like a buy for dividend investors.