ExxonMobil's (NYSE:XOM) stock has fallen by more than a third so far in 2020, and its yield is up to a historically high 7.7%. There are very real issues facing this energy giant today, which is why the shares are down and the yield is up. But despite the headwinds, it's still managing through a rough period in pretty good form. How's it doing that? It's relying on one of its biggest strengths. Here are some key numbers to show what that means.
It's ugly right now
There's really no way to sugarcoat what's going on in the energy sector today. With the industry already working through a supply/demand mismatch, the global efforts to slow the spread of COVID-19 by effectively shutting down economic activity added a brutal hit to demand. In fact, at one point oil was trading below zero. There were technical reasons for this, but it basically meant that drillers were paying customers to take oil off their hands. Oil prices have recovered materially since that point, but they are still at levels that make it hard for drillers to turn a profit.
Even worse, the demand decline was widespread, hitting downstream businesses (refining and chemicals) as well. So while Exxon's diversified operating model, with businesses across the entire energy industry, is normally a net benefit, this time around it hasn't been particularly helpful.
And there's no quick fix either. Supply and demand are both problems. On the supply side, oil and other energy products that haven't been getting used have been put in storage. All of that excess product has to be worked off before sustained price increases are likely. Meanwhile, COVID-19 cases appear to be spiking again in countries that have begun to reopen. That suggests that the economic recovery from the coronavirus shut downs, and a related increase in demand for energy, could be slow.
None of this is good for oil companies like Exxon. However, this difficult period is unlikely to be the end of the industry, even if weaker names are increasingly finding themselves in bankruptcy court. But that brings up one of the key differences between Exxon and its peers.
Leaning on this key strength
Exxon has long taken a conservative approach to the energy space, relying on a strong balance sheet as a financial backstop during tough times. This downturn has been no different. There are, however, two sets of numbers investors need to consider.
For one thing, between the end of 2019 and the end of the first quarter of 2020, Exxon's long-debt load increased by nearly a third. That's a huge change in a very short period of time. The goal of the increase was pretty straightforward: Management wanted to raise cash so it could keep investing in the business and supporting the dividend. For conservative investors, however, such a dramatic change should be a bit concerning. That's why some context is in order.
Despite the increase in debt, Exxon managed to cover its trailing interest expenses by roughly 18 times in the first quarter. That's much lower than it was in recent quarters, but still a very robust number. In fact, it's at the high end of the company's direct peer group. This number will likely continue to fall in the quarters ahead, but the point is that Exxon is not out of step with other integrated oil majors.
Interestingly, even the elevated debt load it's carrying isn't as bad as it seems. Yes, Exxon's financial debt to equity ratio of roughly 0.35 times has more than doubled from where it started the year (around 0.15 times). And it's true that the current number is high by historical standards for Exxon. But when you compare Exxon's leverage to that of its closest peers, it still holds up pretty well. In fact, only domestic competitor Chevron has a lower financial debt to equity ratio, with most of Exxon's European competitors still about twice as high on this metric. It's also worth noting that, in the grand scheme of finance, a debt to equity ratio of 0.35 times is a pretty reasonable number.
Basically, Exxon's balance sheet entered this industry downturn in rock-solid shape, and it is using that strength to ensure it can muddle through in one piece. This isn't good news, but it is part of the company's long-term game plan. One that it has successfully used before.
Watch, but don't lose too much sleep
It would be disingenuous to suggest that investors shouldn't worry about Exxon's balance sheet. Increasing leverage is often a warning sign of financial troubles to come. That said, Exxon's leverage is still reasonable, despite the uptick, and toward the low end of its peer group. You do need to monitor the company, though --this downturn is very real, and it has been very painful. However, there's no particular reason to fear the worst just yet.