ExxonMobil (NYSE:XOM) is unquestionably in a tight spot as the coronavirus pandemic has sucked demand out of the energy sector. Revenue has tumbled, profits narrowed, capital expenditures have reduced, and job cuts have been announced.
One thing that hasn't been touched, however, is the oil giant's dividend. Although Exxon didn't raise the payout this year -- the first time in 18 years it hasn't done so -- it didn't cut it either.
That makes it one of the few energy majors that haven't cut their dividends. BP (NYSE:BP), Eni (NYSE:E), Occidental Petroleum (NYSE:OXY), and Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) have all slashed their payouts.
With the energy sector likely to remain in turmoil for some time to come, let's take a look at how safe Exxon's dividend is.
A smaller giant
Cost-cutting is the watchword now along with improving efficiencies, meaning there are more job cuts coming. Exxon told analysts it expects its workforce to be 15% smaller in 2022 than it was in 2019, with most cuts coming in the above-field and above-site organizations. It sees as many as 1,900 jobs being eliminated, mostly from its headquarters.
"These actions will improve the company's long-term cost competitiveness and ensure the company manages through the current unprecedented market conditions," the company said in a statement at the end of October.
Reining in expenses will be paramount because Exxon's debt load is significant, but as it has admitted, there are "too many unknowns."
Carrying a heavy load
Exxon is carrying $46.9 billion in debt, some 77% more than it ended 2019 with, as it took on substantial new commitments because of the COVID-19 outbreak.
Yet despite the seemingly excessive levels of debt, it retains relatively low financial leverage. Its debt-to-equity ratio, for example, is roughly 0.39 times, which at about twice what it was when it started the year, is negligible compared to some of its peers. Occidental's debt, for example, runs 2.83 times its equity and BP is at 1.21 times. Because of Exxon's massive size, its ratio seems manageable.
Even demand for its products, though still constrained, is improving.
It noted earnings increased by $700 million last quarter as demand recovered from the "unprecedented" low levels of the second quarter. As the economy reopened and the travel and tourism industries tried to climb out of the landslide under which they were buried, inventories have started to fall.
But Exxon has been through such gyrations before, and it knows how to handle them. The fluctuations in supply and demand even within certain channels, such as increased demand for diesel and gasoline, but negligible tailwinds for jet fuel, require a juggling act.
A sturdier foundation
The oil giant has diversified operations across the full spectrum of hydrocarbons and its integrated operations in upstream, midstream, liquified natural gas, and downstream refining mitigates many of the risks that might make a lesser player succumb.
With substantial proved reserves and significant refining capacity, ExxonMobil has a buffer that should serve it well through this crisis. Admittedly, there is a finite amount of time that it or any of its peers can withstand the strain, but the work in reorganizing its operations of the past few years helped prepare it for today's troubles.
The dividend has been a foremost concern of management, even through the pandemic. It sees no trouble with making the payout next year and says that pricing need only rise to the low end of its 10-year range, with Brent crude oil priced within credible estimates, for it to pay "a reliable and growing dividend."
There's good reason analysts and investors have been cautious when it comes to ExxonMobil, but there seems every reason to believe its dividend will remain intact and resume its growth trajectory.