Schlumberger (SLB 6.59%) and ExxonMobil (XOM 3.68%) dividends are now yielding the most they have in over 30 years, at 11.5% and 8.1%, respectively. At first glance, this makes now seem like an attractive entry point for two of the most well-known oil and gas companies. However, both Schlumberger and ExxonMobil have more aggressive strategies relative to their peers in terms of spending and debt, and their rising dividend yields have been fueled by their stock prices falling in response to the collapse of oil prices.
In this matchup, despite its lower yield, ExxonMobil is the better dividend stock due to its superior balance sheet, diverse business portfolio, and the ability to operate in lower oil environments. However, Exxon, like other strong oil and gas companies, faces its share of challenges in a $20 oil environment. A better understanding of both Schlumberger's and Exxon's hardships could indicate that many of the industry's dividend yields are at risk.
In its heyday, Schlumberger and oilfield services peers like Halliburton and Baker Hughes were coveted oil and gas companies. From the dawn of the shale revolution in about 2005 to just before the oil crash of 2014, Schlumberger was front and center, supplying services and technologies to shale plays across America. Schlumberger was instrumental in developing, servicing, and supporting many of the onshore and offshore oil and gas fields that led to the U.S. becoming the leading oil-and gas-producing country in the world.
Since 2014, Schlumberger has been struggling to succeed in a lower oil price environment, and its stock has fallen over 80%. Compared to Baker Hughes, Schlumberger is more focused on the upstream segment of oil and gas, meaning drilling, exploration, and production, leaving the company vulnerable to falling oil prices. Schlumberger's core business depends on new activity in the oil patch and that isn't what we're seeing.
Since 2015, net income and free cash flow (FCF) have fallen off a cliff, although FCF has somewhat stabilized. Since increasing it in 2015, Schlumberger has not decreased its $0.50-per-share quarterly dividend, although this provides small consolation for shareholders who have lost much more on the declining stock price.
According to the Baker Hughes rig count, onshore crude oil rigs in the U.S. closed April 10 at 504. In April of last year, the number was over 800. Commodity traders are so desperate to avoid selling their oil that they are storing it in everything from tanks to supertankers to even rail cars. Research firm IHS Markit believes that the world will run out of storage by the middle of the year.
Low oil prices and declining rig counts are bad enough for the oil and gas industry as a whole, but they are even worse for Schlumberger, which has a weak balance sheet and debt to capital, financial debt to equity, and total net long-term debt near 10-year highs.
Oversupply in the oil market; the collapse in demand from coronavirus-related decreases in transportation and industrial production; and a two-month, 10-million-barrel-per-day (BPD) OPEC+ production cut that is too little too late will likely mean oil prices below $40 or $30 for, at minimum, the next quarter.
At $100 oil, Schlumberger is a cash cow that is arguably one of the best stocks in the market. At $50 oil, Schlumberger is barely getting by. At $30 oil and below, Schlumberger is in nothing short of a crisis.
ExxonMobil is an aggressive supermajor that prides itself on innovating to be the best oil and gas company in the world, whereas its competitors are more focused on renewables. The company's high capital spending program is focused on achieving the scale needed to lower costs and drive efficiency. During Exxon's 2020 investor day on March 5, as the coronavirus pandemic was taking form, CEO Darren Woods highlighted "the advantages we expect to gain from really leaning into this market when others have pulled back, and while saying that, [we] remain very mindful of the challenges of the current market environment."
Since then, the tone has shifted, to the tune of a 30% reduction in capital expenditures and a 15% reduction in cash operating expenditures that Exxon announced on April 7. That 30% reduction will mostly impact the company's Permian investments. As I noted in a previous article, Exxon's Permian investments stand out as something to trim during this time.
Note that Exxon has to invest in some sort of oil and gas project to avoid the depletion in its assets. So in a lower oil price environment, it's still cost-effective for Exxon to allocate resources toward its long-term investments in Guyana, Brazil, and other existing projects as they represent a better long-term return at this point in the project development stage than Permian shale assets. Though the Permian shale assets are flexible and offer a quicker return than starting a new megaproject, leaving Exxon in a position to quickly ramp up production if oil prices rise to profitable.
Aside from its production plans, Exxon remains committed to paying its dividend. "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," said Exxon in its April 7 press release. It's worth noting that Exxon is a Dividend Aristocrat, having raised its dividend for 37 consecutive years, and hasn't cut its payout since 1948 (split-adjusted). This is no small accomplishment for Exxon considering the ups and downs that the oil market faced during that 37-year time frame.
But this also puts Exxon between a rock and a hard place. If it cuts its dividend, it will lose Dividend Aristocrat status and anger income investors. If it doesn't cut its dividend, it almost certainly has to fund it using debt, and that's a drag on the business long term.
The safer bet. But is it one you want to make?
Exxon's complete flip-flop from "leaning into this market" to massively cutting its capital spending is an indication that Exxon is admitting it was wrong and now recognizes the severity of this oil crash. This change of heart from ambition to prudence is a good sign for income investors who believe that Exxon is a solid long-term oil and gas play.
There's never been a better time to collect Exxon's dividend, but there also hasn't ever been an oversupply paired with a demand shock of this magnitude either. ExxonMobil is certainly a risky bet, but its stock and its dividend are loads safer than a company like Schlumberger that is struggling to stay afloat.