Oil prices were mixed in early trading, but Exxon’s earnings weren’t. And investors weren’t happy about it.
What happened
Shares of integrated energy giant ExxonMobil Corporation (NYSE:XOM) fell as much as 5% within the first hour of trading today. That’s a notable move for the company, which is highly diversified across the oil and natural gas sector and normally doesn’t see the kind of big stock price swings to which smaller players in the industry are often prone. Making it even more interesting is the fact that oil prices were mixed in early trading, so not really a factor in the negative sentiment here. Indeed, it was all about earnings.
So what
Before the market opened, Exxon reported a loss of $0.14 a share, driven by a $0.67-per-share charge (writing down the value of assets because of low energy prices). Pulling out that one-time item, the company earned $0.53 per share. However, the bigger number here was likely cash flow, which came in at around $6.3 billion. The problem is that the energy giant pushed $7.1 billion out the door to fund its capital spending plans in the quarter. Add in $3.7 billion in dividends paid and it’s easy to see that Exxon didn’t even come close to covering its dividend with cash flow in the first quarter. It wasn’t exactly expected to, but the size of the shortfall is sobering.
Image source: Getty Images.
Exxon, however, remains committed to the dividend and has reduced its capital spending plans for the year. It entered 2020 with $33 billion of capital spending scheduled and is now down to roughly $23 billion. Pulling out the first quarter’s spending, that suggests Exxon will invest, on average, around $5.3 each quarter from here on out. Since the rest of 2020 is likely to be hit even harder than the first quarter by the impact of COVID-19 economic shut downs, it’s likely that Exxon will be leaning very hard on its balance sheet to get through this period without a dividend cut. So far it has already tapped the debt markets for $18 billion.
Now what
Investors are justifiably concerned that Exxon’s dividend isn’t sustainable, noting that the dividend is one of the biggest reasons to own the stock. As such, Wall Street, understandably, didn’t take the earnings news very well. At this point management remains committed to the dividend, as it has through previous periods of low oil prices (the dividend has been increased annually for more than three decades). The global supply glut of oil caused by COVID-19, however, is different than anything the world has dealt with in modern times. Exxon, at this point, doesn’t look quite as rock solid as it once did.
