Seven years ago, Exxon Mobil (NYSE: XOM) had just surpassed Apple (NASDAQ: AAPL) to become the largest company in the world. Now, Exxon Mobil is less than 10% Apple’s size. Currently muddling along into the 6th year of one of the worst oil crashes ever, Exxon Mobil, with a more than 8% yield, reported a $1.1 billion GAAP loss in the 2Q 2020.
Does the company have a future, or will it be forced to cut its dividend and slowly wither away? As we’ll see throughout this article, the time to be greedy is when others are fearful. In a world that continues to utilize fossil fuels, Exxon Mobil is here to stay. For those willing to take on the risk, the company represents a unique long-term opportunity.
Exxon Mobil – Market Realist
Exxon Mobil Second Quarter 2020
Exxon Mobil has gone through one of the most difficult time periods in its history since the first quarter 2020.
Exxon Mobil watched liquid realizations fall ~50% versus the 1Q with significant production curtailments of nearly 10% of its production. The company’s Guyana Phase 1 has operated at full capacity and the company is setting up its Phase 2 FPSO. The company started up Permian Basin processing facilities and has continued to maintain operational performance.
On the downstream world, the company saw refining margins decrease ~50% below ~10-year annual years. The company is slowly focused on recovering refining, but it has significant room to go. Similarly in the chemical margins, the company has had issues. The company has focused on lowering corporate costs as it worked through the difficult period.
Exxon Mobil 2Q 2020 vs. 1Q 2020 Results – Exxon Mobil Investor Presentation
The company had 2Q 2020 Earnings (Loss) excluding identified items of -$3.0 billion versus +$2.3 billion in 1Q 2020. It’s worth noting here that a significant % of investors believe that the company isn’t adequately valuing its inventory for current oil prices. However, for a company with nearly $4 billion in quarterly dividend obligations, -$3.0 billion in losses are significant.
Exxon Mobil is borrowing to cover its expenses.
Exxon Mobil Financial Strength
Exxon Mobil has significant financial capacity due to its size to handle the worst of the oil collapse.
Exxon Mobil Liquidity – Exxon Mobil Investor Presentation
Exxon Mobil has significantly expanded its liquidity. The company’s total liquidity has increased from $3 billion cash and nearly $10 billion in revolving credit facilities to nearly $15 billion cash and $15 billion in revolving credit facilities. That amount of liquidity is more than 15% of the company’s market capitalization, more than enough to handle the downturn.
Exxon Mobil has issued significant debt recently. The company issued 30-year debt at 3.45% borrowing a total of $9.5 billion. The company continues to remain one of the best debt / book capitalization ratio among the company’s peers. That low ratio combined with the company’s strong liquidity means continued shareholder returns despite the company’s difficulties.
Exxon Mobil Outlook
Exxon Mobil has turned this into a respectable outlook for the 3Q 2020, which will help support the company’s cash flow.
Exxon Mobil 3Q 2020 Forecast – Exxon Mobil Investor Presentation
Exxon Mobil is expecting ~200 thousand barrels / day in production curtailments from a variety of economic production curtailments along with government mandated ones. The company is expecting margins remaining week across the board but improving demand. Additionally the company is expecting cost reductions across the board.
All together, the company is expecting the overall portfolio to improve along with its financials.
Exxon Mobil Long-Term Opportunity
Long-term, the opportunity for Exxon Mobil is based on its ability to increase production, especially as oil prices and demand recover.
Exxon Mobil Permian Basin – Exxon Mobil Investor Presentation
The most significant opportunity for the company is based on the development of the company’s assets. The company achieved June production of nearly 350 thousand barrels / day, roughly 15 thousand barrels a day down versus the company’s investor day. The company has cut its capital spending here significantly and delayed flow back.
However, that doesn’t hide the potential size of the company’s business here on its way to reaching 1 million barrels / day. The company is planning to dramatically decrease its rig count from 30 in 2Q to 10-15 rigs by YE. This giant operation is aiming for $15 / barrel costs with WTI costs of more than $40 / barrel.
Exxon Mobil Guyana – Exxon Mobil Investor Presentation
Exxon Mobil’s other major project is its Guyana offshore projects. The company’s 45% stake here means significant low cost oil, oil that’s so high quality it actually sells for several $ / barrel more than Brent. The company has started Phase 1 production at 120 thousand barrels / day and Liza Phase 2 remains on schedule for 2022 start-up.
The company has 4 drilling rigs operating here. It’s continued to make a number of significant discoveries and in early-2020 it increased its reserves estimate by more than 2 billion barrels / day. The company plans to expand this to more than 750 thousand barrels / day and has significant room to continue expand past that.
The company’s continued focus on this business, where subsequent developments are expected to cost $25 / barrel. These projects together mean a significant expansion of low cost oil for the company.
Exxon Mobil Risk
Exxon Mobil’s risk is quite obvious. During the world of COVID-19, oil prices collapsed and basically no oil company in the world can make money at $20 / barrel. However, with that aside, the company is one of the largest and lowest cost oil producers in the world. It has the cash to pay a dividend of more than 8%, a respectable dividend at current prices.
The downside for the company is continued low oil prices, however, the company has significant potential to recover. At current oil prices, the company will generate respectable cash flow, and with a recovery, that cash flow will increase significantly. We recommend investors take advantage of current share prices to invest at this time.
Exxon Mobil has had a difficult time as it has rapidly lost its position as one of the largest companies in the world. The company remains focused on maintaining its near 9% dividend, however, its uncertain whether it’ll be able to do so – at this point it is borrowing the entire amount of its dividend. The company has the liquidity to do so, but it’s not permanently sustainable.
Long-term, investors need to pay close attention to the recovery in oil prices. The company has access to significant low cost oil production that’s growing rapidly in both the Permian Basin and Guyana. This low cost production will eventually pay off as prices recover, and it means that despite the company’s dividend position the company is a good investment.
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Disclosure: I am/we are long XOM, AAPL. 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.