There's no way to sugarcoat it: Oil giant ExxonMobil (NYSE:XOM) has had a very, very bad year. Shares are down more than 35% year to date.
Of course, the last few years haven't been all that great for the company, either: ExxonMobil's stock has lost more than 45% of its value over the past three years. In fact, ExxonMobil's shares haven't been this low since 2004.
Is it time to buy?
Oil or turmoil
To be fair, ExxonMobil isn't the only oil company that has been bruised by 2020. Nearly every company in the industry took a big hit in early March after an oil price war broke out between Saudi Arabia and Russia, cutting crude prices practically in half. When the coronavirus pandemic exploded in mid-March, demand for fuel dried up, leaving the world awash in cheap oil that nobody was using.
Oil prices have since recovered somewhat. International benchmark Brent Crude and U.S. benchmark WTI Crude have stayed above $40/barrel for almost the entire month of July. That's still a far cry from January's high of more than $60/barrel, but things are moving in the right direction, at least.
ExxonMobil can profitably pump oil from some of its fields at these prices. For example, its massive offshore Guyana growth play should be able to turn a profit at $40/barrel Brent Crude. However, other portions of its portfolio aren't nearly as viable. The company hasn't released an official number, but some analysts believe ExxonMobil could need oil prices as high as $75/barrel to break even.
Considering oil prices have only briefly surpassed that level once in the last five years (in mid-2018), ExxonMobil may not be headed for profitability anytime soon.
Earn or burn
It's possible that low oil prices could stick around for months if not years. Can Exxon?
In short: yes, probably.
ExxonMobil has cut $10 billion, about 30%, from its 2020 capital budget and has made an additional 15% cut to its operating expenses as well. Those moves, coupled with the company's size -- it's still the largest oil company in the world by market cap, at $184.5 billion -- should be enough to ensure it can weather the current economic downturn without going under.
Of course, "not going under" is very different from "outperforming." It's tough to see how ExxonMobil -- or any oil company, for that matter -- can thrive in a world where there's so much oil oversupply. Even with major OPEC+ production cuts, agreed to in April, crude prices aren't anywhere close to levels needed to ensure continued profitability. And those OPEC+ production levels are subject to change at pretty much any time.
However, there's another potential argument for buying ExxonMobil. It's a Dividend Aristocrat that has raised its payout every year for the last 37 years. With a current yield of about 8%, the company could be a good choice for dividend investors...if that yield sticks around.
Payout or stay out
ExxonMobil's dividend currently costs the company about $15 billion per year. Meanwhile, its free cash flow has plummeted over the past year, to only about $2.5 billion. That, combined with the company's current $11.4 billion cash hoard, wouldn't even cover a year of dividend payments. That leaves taking on additional debt as one of the only avenues to fund the dividend.
Peer oil major Royal Dutch Shell bit the bullet and cut its dividend in April, but there are signs that ExxonMobil isn't going to go that route. Its aforementioned size and its balance sheet -- strengthened by years of conservative fiscal management -- have put it in a position to raise debt on favorable terms. Indeed, despite recent ratings downgrades from S&P Global and Moody's, ExxonMobil's debt is still rated high-grade, at Aa1/AA. Its current long-term debt load of $59.6 billion is just 1.3 times earnings before interest, taxation, depreciation, and amortization (EBITDA), one of the lowest of the oil majors, so it has some wiggle room on its balance sheet.
The biggest sign, though, that ExxonMobil isn't going to jeopardize its Dividend Aristocrat status by cutting its payout came from CEO Darren Woods on the first-quarter 2020 earnings call. "[I]f you look at our shareholder base, about 70% of them are retail or long-term investors that look for our dividend and see that as an important source of stability in their income," he said. "And so we have a strong commitment to that."
Translation: ExxonMobil isn't likely to cut its dividend...but that's no guarantee that it won't if the oil markets rapidly deteriorate.
Buy or bye
It's tough to call ExxonMobil a buy right now. The company is a long-term underperformer in a volatile industry weathering unprecedented challenges. It's not really clear how the company could return to consistent outperformance anytime soon.
ExxonMobil's dividend is less risky than many other oil stocks', and its yield is far higher than many other Dividend Aristocrats'. Oil prices seem to have -- for now -- stabilized to the point that an imminent dividend cut is unlikely. Dividend investors who have moderate risk tolerance might consider buying in for that reason. Most investors, though, will find better opportunities elsewhere in the energy sector.