Having seen its price cut nearly in half by the coronavirus from China and an oil price war, Exxon Mobil (NYSE:XOM) has its executives buying the plunge.
The company’s principal financial manager and the head of its Global Projects unit, both 40-year veterans at the company, bought shares of XOM stock trading between $34-37/share. It was due to open March 36 at $36.50.
At that price, Exxon Mobil sports a dividend yield of nearly 10%, but many think it’s a trap. The company is taking actions to save the payout, cutting a capital spending plan first set at $30-35 billion per year over the next five years. Exxon Mobil is also selling bonds to raise cash. It had just $3 billion of it on its balance sheet at the end of December.
Bargain? Or Trap?
Despite these moves, most analysts have been downgrading the shares.
Goldman Sachs (NYSE:GS) issued a sell order in early February, when the shares were trading at over $60. That has proven prescient, although with U.S. government bonds hovering near 1%, clients may be wondering where to put the money they saved. An analyst called “Dividend Guy” is the exception, having issued a call to buy XOM stock in early March, when the shares were at about $50.
In a normal year, Exxon Mobil generates $30 billion or more in operating cash flow. As recently as 2018, it had $16.4 billion in free cash flow, even after $19.5 billion in capital spending. This made it easy to justify an 87 cent-per-share quarterly dividend that costs it $14.27 billion per year to maintain.
Chevron (NYSE:CVX), meanwhile, has suspended its dividend and cut its capital spending by 20%. This is despite the fact it is “self-liquidating”, and unable to increase reserves as fast as it pumps them.
The Oil War
The coronavirus was the second in a one-two punch that has hammered the oil sector. Saudi Arabia and Russia chose the beginning of the viral crisis to stop cooperating. Instead of pumping less in the face of slumping demand they’re pumping more, hoping to destroy the U.S. oil sector.
West Texas Intermediate, the main U.S. oil grade, was trading at over $60 per barrel in early January. On March 26, it was trading below $24per barrel. Producers can barely give away natural gas. Exxon Mobil flares more gas in the course of its West Texas oil production than any other company. Exxon is now trying to re-write the rules on methane releases, even after Obama-era rules were rolled back last year.
Critics say Exxon Mobil is playing a double game. On the one hand, it is running ads, endorsing climate science. On the other hand, it is increasing its environmental destruction. It wants to self-report leaks after ignoring a 2018 Ohio well blowout that sent 120 metric tons of methane into the air per hour for 20 days. That’s more than Norway loses in a year.
The Bottom Line on XOM Stock
Secretary of State Mike Pompeo was recently in Saudi Arabia, where he asked its Crown Prince to “rise to the occasion” and end the oil price war. The Saudis are presently due to increase their supply by 1 million barrels per day next week.
If Pompeo can stop that cut, possibly using U.S. military aid as leverage, prices might stabilize. Exxon might then earn cash, even with prices at their present level. The stock has recently been trading higher in anticipation, and over the near term you can gamble the bulls are right.
But for now, Exxon Mobil is trading like a tobacco stock. In Wall Street’s eyes that is just what it is.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.