Exxon Mobil Needs Some Good News To Avoid A Dividend Cut (NYSE:XOM)

(Source: Reuters / Lucas Jackson)

Exxon Mobil (XOM) has been unable to move forward and protect its big, attractive dividend. Problems keep arising, and setbacks not of the company’s own making are jeopardizing the dividend payment.

I recently wrote an article on the company called “Exxon Mobil: I Told You To Sell At $88, Now I’m Telling You To Buy At $48,” where I argued that it had reached a compelling buy point. This was 4 years after I recommended selling Exxon Mobil in this article: “No Ha-Ha At Doha: Saudi Arabia Raises The Oil-Price Ante, And Exxon’s Credit Takes A Hit.”

But as the COVID-19 pandemic continues to take its toll on oil prices I am beginning to worry whether the company can maintain its dividend going forward.

And the dividend is a major reason to own the stock, as I said in the article “Exxon Vs. Shell: Exxon Wins By A Dividend.”

Here are 5 reasons I think the dividend may be cut.

1. Saudi Arabia is back in the oil price driver’s seat.

SA (Saudi Arabia) cut prices to China and Asia last week, sending oil prices tumbling to their lowest since July.

U.S. West Texas Intermediate crude skidded 64 cents, or 1.6%, to $39.13 a barrel after earlier dropping to $38.55, the lowest since July 10. The world remains awash with crude and fuel despite supply cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, and government efforts to stimulate the global economy and oil demand.”

Source: Energy Economic Times

Even with the cuts by OPEC and OPEC+ demand is not recovering. This does not bode well for Exxon Mobil’s dividend.

2. Foreign governments are demanding more money before allowing Exxon’s new projects to come on-line.

As if Exxon Mobil doesn’t have enough problems, both Guyana and Papua New Guinea (PNG) have made demands for renegotiating payments from projects in their countries.

Among other guidelines, Marape (PNG Prime Minister) said that the state must take a 60% to 65% share of revenue from future projects, up from just 40% on recent petroleum ventures.

and

PNG “has been unfairly held to ransom” by Exxon and its partner Oil Search Ltd.

That sounds like a pretty serious negotiating position.

Things are also dicey in Guyana, where the new president is questioning the profit-sharing agreement with Exxon.

Exxon Mobil is pressing Guyana’s new government for approval of the planned 220K bbl/day Payara offshore oil project – its third in the country – which has been under a months-long review that coincided with a tumultuous election campaign.

Source: Seeking Alpha

3. Low oil prices may force a large reserve writedown this year.

Exxon Mobil, unlike BP plc (BP), which took a $17 billion reserve hit, has resisted writing down recoverable reserves. But if prices don’t recover by year-end, I expect a big writedown to perhaps as much as 4.5 billion barrels of oil.

Exxon Mobil Corp. warned that low energy prices may wipe as much as one-fifth of its oil and natural gas reserves off the books.

If depressed prices persist for the rest of the year, “certain quantities of crude oil, bitumen and natural gas will not qualify as proved reserves at year-end 2020,” the company said in a regulatory filing on Wednesday. A 20% hit would impact the equivalent of almost 4.5 billion barrels of crude, or enough to supply every refinery on the U.S. Gulf Coast for 18 months.

Source: Bloomberg

Without a sustainable increase in oil prices, I see this as inevitable and another factor supporting management’s justification for a dividend cut.

4. Large employee cuts may be coming soon.

Recently, Exxon Mobil announced it is considering employee cuts.

This is not unexpected, as BP plc has already cut 10,000 and Shell (RDS.A) has cut 6,000.

“We have evaluations underway on a country-by-country basis to assess possible additional efficiencies to right-size our business and make it stronger for the future,” spokesman Casey Norton said in emailed comments to Reuters.

Will it be possible for Exxon management to keep the dividend as is if thousands of employees are laid off?

5. Borrowing to pay the dividend cannot go on much longer.

In the June quarter just ended, Exxon Mobil had negative free cash flow of about $5 billion. That means to pay the $3.2 billion worth of dividends each quarter, it will have to borrow the money. No wonder the company is looking at employee cuts.

Of course, with Exxon’s A credit rating, borrowing more money is not an immediate problem, especially with rates so low. Just a year ago, the company borrowed $750 million at a rate of 1.9%.

But you have to wonder how long the Board of Directors will allow the dividend to stay where it is if free cash flow continues negative. My guess is 2 more quarters max.

Conclusion

CEO Darren woods recently made this statement:

“significantly impacted near-term demand, resulting in oversupplied markets and unprecedented pressure on commodity prices and margins.”

The keyword is “unprecedented,” because if low prices and reduced demand continue, then another unprecedented event could be on the horizon: a dividend cut.

And, in fact, if Exxon Mobil continues to pay the dividend in spite of negative cash flow, that would be another reason to sell the stock.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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