Anyone who was expecting a good second quarter from energy giant ExxonMobil (NYSE:XOM) was fooling themselves, especially after fellow oil supermajor Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) reported dismal earnings just a few days prior.
Some investors were hoping for the company to at least outperform the low expectations Wall Street had set. Unfortunately, ExxonMobil wasn't even able to clear that bar, posting a $1.1 billion loss and zero cash flow -- none! -- for the quarter.
As bad as it was, Q2 results did highlight ExxonMobil's strengths, as well as the challenges it needs to address. Here's what investors need to know.
By the numbers
|Metric||Q2 2020||Q1 2020||Q2 2019||Change (YOY)|
|Revenue||$32.6 billion||$56.2 billion||$69.1 billion||(52.8%)|
|Net income (loss)||($1.1 billion)||($610 million)||$3.1 billion||N/A|
|Operating cash flow||$0||$6.3 billion||$5.9 billion||(100%)|
|Liquids production*||2.3 million BOE/D||2.5 million BOE/D||2.4 million BOE/D||(3.5%)|
|Average realized per-barrel crude oil prices (U.S./non-U.S.)||$21.79/$20.91||$42.82/$41.96||$57.95/$62.47||(62.4%)/(66.5%)|
Everything was down, from revenue to production. Pretty much all of that can be traced back to the low oil prices during the quarter. ExxonMobil's average realized prices for crude oil were less than $22 per barrel for both U.S. and non-U.S. production. That reflected a combination of oversupply due to the collapse of OPEC+ production curtailment talks, and lack of demand caused by the coronavirus.
ExxonMobil reported no operating cash flow at all in Q2. In spite of that, it's still maintaining its dividend at $0.87 per share, which costs the company $3.7 billion per quarter. In order to pay that dividend, along with capital expenditures of $5.1 billion, ExxonMobil had to raise another $10 billion of debt during the quarter. So far in 2020, it's added $22.1 billion in debt to its books, while its cash hoard sits at $12.6 billion.
So, yeah, this quarter was horrible, as expected. The big question investors should be asking is whether the worst is behind ExxonMobil, or if there's more bad news to come.
What management had to say
ExxonMobil management seems sanguine about the company's prospects. In a press release, CEO Darren Woods projected it wouldn't have to raise any more debt this year.
Management is also predicting higher refinery utilization and improving petrochemical demand in Q3, along with higher production as government-mandated curtailments are eased. On the earnings call, Neil Chapman, the senior vice president in charge of Exxon's upstream division, said that the company will meet or exceed its 2020 targets of a 30% cut in capital expenditures and a 15% cut in operating expenses. Chapman also anticipates ExxonMobil will further trim its expenses in 2021.
Also on the call, Stephen Littleton, vice president of investor relations, said he believes the company now has the capacity to "preserve our long-term growth plans and capital allocation priorities." Prior to the pandemic, Woods planned to use ExxonMobil's clout to pursue billions of dollars' worth of growth projects, "leaning into this market when others have pulled back."
Littleton and Chapman clarified during the Q&A session that potential new growth projects and M&A expenses wouldn't be included in the company's projected cost-cutting.
The road ahead
It's unclear what's next for the oil industry in general and ExxonMobil in particular. On the one hand, there are signs that oil markets have turned a corner. OPEC+ was able to hammer out a revised deal curbing global oil production in light of COVID-19. U.S. benchmark WTI crude and international benchmark Brent crude prices have stayed above $39 per barrel and $42 per barrel, respectively, for the past month, roughly double Exxon's realized prices in Q2.
That looks promising for the oil giant, although ExxonMobil's average realized prices tend to lag benchmark prices. In most quarters, that difference is less than 10%. In Q2, however, ExxonMobil's average realized U.S. crude prices lagged WTI Crude by 21.6%, and its non-U.S. realized crude prices lagged Brent Crude by 28.3%. As ExxonMobil makes adjustments to its portfolio, this may return to the norm, but it's something investors may want to watch.
Another red flag for ExxonMobil is its once-sterling balance sheet, which has taken a hit over the last decade. The company started 2010 with less than $10 billion in long-term debt. However, during the oil price downturn of 2014-2017, that debt load soared to more than $40 billion. Now it's at $69.5 billion, or about 1.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA).
That's still lower than the European oil majors (Shell's debt is about 2.1 times EBITDA, for example). However, if Woods spends tens of billions of dollars on growth projects and continues funding the dividend at $3.7 billion per quarter, what happens if oil prices slip again?
ExxonMobil took it on the chin in Q2, but by using its size and strength to tap the debt markets and maintain its dividend, it managed to tough its way through.
However, the company still has some potential vulnerabilities. Major possible weaknesses include the growing amount of debt on its balance sheet and the threat of persistently low oil prices. ExxonMobil is clearly committed to paying its dividend, which may make it attractive for income investors, but other investors should probably proceed with caution.