ExxonMobil (NYSE:XOM) sure had a tough 2020. The company posted its first annual loss in at least two decades. Higher oil prices have lifted the stock this year, but is the worst over for the oil giant? Let’s take a closer look at the company’s operations and plans to understand how it may fare in the long run.
ExxonMobil got hit on all fronts last year. Lower oil and gas prices and reduced production volumes impacted the company’s upstream operations. At the same time, lower refining margins and demand hurt its downstream businesses. Further, based on an assessment of the changed market conditions, the company decided not to develop a significant chunk of its dry gas assets resulting in a massive impairment charge of nearly $17 billion in the fourth quarter. The decision also considered the need to cut capital spending to focus only on the highest-return assets.
ExxonMobil generated $14.7 billion in cash from operating activities last year. That fell well short of covering its massive capital expenditures and dividend outlays for the year, forcing it to borrow funds for the same. The company paid $14.9 billion in dividends while spending roughly $19.5 billion on capex. Its proceeds from asset sales were $1 billion.
In addition to challenging market conditions, ExxonMobil’s woes can partly be attributed to lapses on the management front. This gets reflected in the steep fall in Exxon’s return on invested capital, which was peer-leading for years as the above graphs shows. Heeding to calls for change from investors, the company has already added three new directors to its board this year.
A shift in strategy
All oil and gas companies faced heat last year, and ExxonMobil was no exception. However, it had an additional challenge. When oil demand got crushed due to the pandemic, ExxonMobil was in the middle of a massive capital program. The company’s capital and exploration expenditures for 2019 were $31 billion and it planned to spend $33 billion in 2020. But unfortunately, COVID-19 interrupted those plans.
ExxonMobil, however, didn’t alter its capital plans quickly, hoping that oil markets would eventually recover. But the markets remained challenging, putting a strain on the company’s balance sheet and stock price. As a result, the company, much later than others, decided to cut its spending plans. ExxonMobil’s capital and exploration expenditures in 2020 stood at $21 billion — $12 billion lower than its original plans.
It plans to spend much less — $16 billion to $19 billion — on capital and exploratory projects in 2021. That’s a shift in response to the market conditions. ExxonMobil expects to generate enough cash to pay its dividend while investing $16 billion on capital projects in 2021 if the benchmark Brent oil price remains near $50 per barrel for the year.
Going forward, ExxonMobil intends to balance its three core priorities — balance sheet strength, capital and exploratory expenditures, and dividend payments. Given the uncertainty, the company has now built much more flexibility into its capital plans. It can adjust its spending plans, depending on the market conditions, to generate maximum value for its shareholders.
Actions to maintain dividend
ExxonMobil is also focused on reducing costs. The company reduced its cash operating expenses by $3 billion in 2020. It expects to save another $3 billion in costs by 2023.
Flexible capital plans, cost reductions, and improving markets should help ExxonMobil maintain its dividend in the coming years — one of ExxonMobil’s key priorities. Notably, if oil prices fall and remain lower this year, maintaining the dividend can further stretch ExxonMobil’s balance sheet. Paying dividends using borrowed funds isn’t really an ideal situation for shareholders in the long-term.
Further, the company continues to invest in some of the lowest-cost projects, including in Guyana and Brazil. That should position it well to grow in a variety of price environments.
An attractive stock for long-term investors
ExxonMobil’s stock price has a high correlation with oil prices, which makes the stock volatile. However, for long-term dividend investors, the stock currently offers an attractive yield of roughly 6.2%. Though it’s trading close to its 52-week high, it is still trading at much lower levels compared to its 3- or 5-year highs.
The good thing is that the company is moving in the right direction. Patient investors are likely to be well rewarded. Indeed, investors who held on to their ExxonMobil positions through the steep price declines last year surely have some reason to cheer right now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.