If Exxon Mobil Corporation (NYSE/XOM) is paying out 95% of its profit to maintain record increases in dividend payments to its shareholders, one has to question just how long they can keep it going before throwing in the towel.
When crude oil prices were averaging over $100.00 per barrel in 2014, Exxon’s annual dividend stood at $2.76 per share. Today’s oil prices are hovering in the range of $48.00 per barrel. Despite this lower oil price climate and shrinking profit margins, Exxon decided to increase its annual dividend payout to $2.92 per share, or $0.73 per share on a quarterly basis.
Something isn’t quite making sense here. And I’m not talking about oil prices.
A second-quarter dividend was declared yesterday, indicating that Exxon fully intends to provide shareholders with a cash return, even when oil sits under $50.00 per barrel for a prolonged period. And what about the very real possibility of oil sliding considerably lower, perhaps even testing January and March lows?
Exxon’s stock has a one-year, three-year, and five-year dividend growth rate of 8.53%, 12.24%, and 10.49% respectively. Sounds healthy, right?
Is this sustainable? Can Exxon maintain dividend payments to its shareholders under the pressure it currently faces? The data should cause even the riskiest of investors to take pause.
On paper, Exxon simply can’t continue to pay out their dividend and simultaneously keep its troubled balance sheet from crumpling. Not if oil prices stay at their current level, and certainly not if they go any lower.
Don’t believe me? The data speaks for itself. Let’s take a quick look at the numbers.
Exxon posted its worst earnings report since 2009 this morning, calling its ability to pay out dividends into question as oil prices continue to flirt with early 2015 lows.
The report represents a 52% decrease in profits from the previous quarter, as gross revenue fell from $111.65 billion a year ago to $74.11 billion.
The company’s net income fell to $4.19 billion—or $1.00 per share—to $8.78 billion, or $2.05 last year. This is a full 11 cents lower than the average forecast by industry experts, on par with some of the gloomiest predictions this past week. Exxon’s share price immediately dropped by two percent, with further declines possible as uncertainty looms on the horizon.
As feared, its buyback program took a major hit. Share repurchases were scaled back to $500 million from $1.0 billion in the second quarter, and an average of $3.0 billion per quarter in previous years. Exxon is attempting to improve its cash flow issues by following a twofold strategy of cutting spending and reducing its stock buyback program.
Oil production increased, however, by 3.6% to four million barrels per day. Profits in upstream exploration and production activities fell by 74% to $2.03 billion. Much hope was placed on lower crude prices translating to increased profits in Exxon’s downstream refining arms, but low crude prices hammered away at profit margins worse than expected. Its chemical refining arm reported a 48% increase in profits at $1.25 billion. The company’s U.S. wells, however, posted a $47.0 million loss.
Expenditures on large projects such as offshore drilling, gas terminals, and floating platforms were slashed by 20% to $6.746 billion. Capital spending fell overall from $9.8 billion to $8.26 billion.
Basic logic comes into play here; Exxon couldn’t cut expenses faster than the price of crude oil plummeted, and hard decisions were made. But there is a limit to how much they can possibly cut costs, and we’re apparently there.
This isn’t a case of Exxon being unable to pay out dividends at the moment. It’s a case of the company not being able to sustain them if oil prices continue their lackluster performance. With continued global oversupply, China’s stock market casting a large shadow, a potential Iranian re-entry into the market by next year, and sagging demand, it’s going to get worse before it gets better. Given its current cash flow problems, Exxon will more than likely have to cry uncle and concede to lowering its dividends.