ExxonMobil (XOM 1.26%) reported a record $19.7 billion profit in the third quarter, fueled partly by surging natural gas prices. Meanwhile, cash flow from operations was even higher at $24.4 billion. That was enough money to cover the company's capital and exploration expenses with lots of room to spare.
The oil giant returned a considerable chunk of that excess cash to shareholders through dividends and share buybacks. However, despite those cash returns, Exxon ended the quarter with over $30 billion of cash on its balance sheet. That colossal cash balance has some analysts wondering if the company has big plans for this money. Here's what Exxon's CFO Kathy Mikells had to say about the company's ballooning cash war chest on its third-quarter conference call.
It's a good problem to have
ExxonMobil ended the third quarter with $30.5 billion of cash on its balance sheet. That's above the top end of its $20 billion to $30 billion target range. Meanwhile, its debt-to-capital ratio was 19%, just below the low end of its target range. Leverage was even lower at 7% on a net basis after factoring in Exxon's sizable cash balance.
That strong financial position led analysts on the call to question what Exxon might do with its cash war chest. CFO Kathy Mikells addressed the query. She started by stating:
I'd say our capital allocation priorities continue to be consistent and we're executing well against that. We've got to continue to make sure we're investing in the business. It's a long-cycle business and that consistency is really critical...We are really focused on ensuring that we've got a fortress balance sheet that gives us all the firepower and flexibility that we need to operate through the cycles and be really prepared for the next downturn.
Given that oil is a cyclical industry, Exxon takes a long-term view. It wants to ensure it has a fortress balance sheet to endure the next down cycle. So it's not overly concerned if it has too much cash right now. Mikells commented that while it's mindful that its cash balance is over $30 billion, "It is possible that our cash balance is going to float up a little bit from there depending on what the market environment continues to look like."
Drilling down into its capital allocation priorities
The CFO then discussed the company's potential uses of cash. She stated:
We look for accretive acquisition opportunities. We're pretty disciplined in that area. And you've obviously seen us more recently looking to execute a number of divestitures in what's been a pretty good market for that activity.
Exxon's always open to acquisitions if it can find the right deal. There were recent rumors that it was considering making a bid for Denbury Resources to bolster its carbon capture and storage capabilities. However, given the currently strong M&A environment, it's finding better opportunities to sell some of its assets than to make acquisitions.
The CFO also noted that Exxon is: "really focused on ensuring that we're sharing our success with shareholders. We're trying to get that balance right." It recently delivered another dividend increase (the 40th straight year of boosting the shareholder payout). It's also executing a share repurchase program that could see it buy back up to $30 billion by the end of next year. It has already purchased $10.5 billion in stock this year, putting it on track to buy back $15 billion by year-end to go with $15 billion of dividend payments. That gives it a pretty balanced return of cash to shareholders. While the company routinely discusses its share repurchase program, its current focus is executing the existing authorization.
Planning to be patient
Exxon's cash balance has grown bigger than the company wanted to keep on hand. That's due to its surging profits, not because it has grand plans for its cash. That likely means its cash balance will continue to balloon, which would only put it in a stronger position to navigate the next downturn when it might find an accretive deal worth pursuing.
In the meantime, the company's big cash balance reduces risk and puts its 3.3%-yielding dividend on an even firmer foundation. That makes it a great option for those seeking a lower-risk oil stock that offers a rock-solid passive income stream.