(An update from our previous article: Will ExxonMobil Announce Layoffs or a Dividend Cut on Friday?)
As we’ve covered in the past, ExxonMobil has made protecting its dividend a priority. On Thursday ExxonMobil made some major announcements in regard to both job cuts and the dividend. The company has decided to keep the decided to keep the dividend at the same payout rate it was previously (87 cents per share). This marks the first time in 38 years that ExxonMobil did not raise the dividend payout. According to CNBC ExxonMobil has also declared that they plan on reducing their U.S. workforce by 1,900 employees by the end of the year. Job cuts are expected to hurt the upstream sector in West Texas the most.
Darren Woods, ExxonMobil’s Chief Executive Officer, said in a recent town hall “These are difficult times.” Many people would consider this an understatement. The impact of the pandemic on businesses big and small, in every community and country around the world has been devastating. The energy sector in particular has taken a massive hit as energy consumption contracted when economies shut down. Oil demand dropped by 20%, from 101 million barrels per day in December 2019, to just 78 million barrels per day in April 2020. The global automobile production dropped by 60% in April compared to 2019. Commercial airplane flights were down 70% during the same period. The lack of air/ground travel has been incredibly destructive to the oil & gas industry.
CEO Darren Woods has said in the past that 70% of the oil major’s investor base is made up of retail and long-term investors that expect a strong dividend. However, ExxonMobil said in the first quarter that the dividend isn’t set in stone but is “flexible” as the board re-evaluates it every quarter. Obviously the decision to keep the dividend stagnant is a major one for ExxonMobil as it snaps a long tradition of raising the payout. Woods had previously asserted that the board would need to see a “sustained structural deficit” in demand before altering the dividend. Clearly the board has not yet seen enough of a “sustained structural deficit” to cut the dividend this quarter and instead has decided to hold firm. Woods is on record saying the coronavirus pandemic has resulted in a “devastating” cut to oil demand by about 20%, roughly five times the decline of the 2008 financial crisis.
Unfortunately for ExxonMobil the virus does not appear to be going away any time soon. Worldwide, more new Coronavirus cases were reported than ever before: over 443,000 and that is before we are in flu season. This will almost certainly keep oil prices low and likely cause the “sustained structural deficit” ExxonMobil was referring to.
“I wish I could say we were finished, but we are not. We still have some significant headwinds, more work to do and, unfortunately, further reductions are necessary,” Woods wrote recently in an email to the company’s workforce of nearly 75,000 employees. “Our plan is to continue to stage project execution and spending, and preserve the value of investments while offsetting inefficiencies and costs associated with deferrals.”
Woods had alluded to the, now official, 1,900 job cuts in a previous statement, “We are making tough decisions, some of which will result in friends and colleagues leaving the company.” ExxonMobil came under criticism earlier this year for using a performance evaluation plan as an excuse to remove employees from the company.
Jennifer Rowland, an Edward Jones analyst, said that ExxonMobil, “has been taking on additional debt for over a year and is likely running out of capacity to continue to do so without jeopardizing the strength of its balance sheet, which is a company crown jewel. This calls into question how long Exxon can continue to fund its dividend if the macro environment doesn’t substantially improve.”
ExxonMobil borrowed $23 billion to fund its dividend for the next several quarters. However, Rowland warned in a July 31 note that ExxonMobil could be at risk of cutting its dividend if it feels the demand will remain at 20% below last year’s levels.
During Exxon Mobil’s earnings call, analyst Doug Leggate of Bank of America questioned the rationale behind their decision to continue paying their dividend saying: “if the market is not prepared to pay for the recovery that you’re laying out, which it clearly isn’t, given where your stock is trading, every time you pay a dividend that you can’t afford, you’re transferring value from equity to debt or basically your share price is going down. And that’s basically what’s happening right now. So, if the market is not paying you for that dividend despite the 60 plus years that you’ve paid this dividend, why would you continue to do that? And I’m curious what the view of the board and the credit agencies are on this issue.”
Leggate & Rowland both make compelling arguments. Many people expected a divided cut this week, I would say a dividend cut in January is probable.
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