Will ExxonMobil Cut its Dividend in January?

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Darren Woods, ExxonMobil’s Chief Executive Officer, said in a recent town hall “These are difficult times.” Many people would consider this an understatement. It’s difficult to describe the devastating impact of the pandemic on businesses big and small, in every community and country around the world. The impact has been especially severe on the energy sector 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. 

ExxonMobil has found itself in a position where it desperately needs to cut costs. The company has been adamant about maintaining its payout, which currently sits at 87 cents. During a first quarter call, CEO Darren Woods said 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. He asserted that the board would need to see a “sustained structural deficit” in demand before altering the dividend. While ExxonMobil is exceeding targeted spending reductions, deferring more than $10 billion in capital and cutting 15% of cash operating expenses, Woods said 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. As we enter the heart of the flu season the virus is almost sure to worsen. With consumer habits changing it could be some time before oil prices fully recover. The “sustained structural deficit” ExxonMobil was referring to does not seem like an impossibility.

“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 Wednesday 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.” 

We now know that ExxonMobil has decided to conduct both voluntary and involuntary layoffs in an effort to cut costs. Employees will be informed by December 15th as to whether they will be involuntarily laid off. 

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.”

Exxon raised $23 billion in debt earlier this year, providing liquidity to fund its dividend for the next several quarters. But Rowland warned in a July 31 note that Exxon is at risk of cutting its dividend if it feels the demand will remain at 20% below last year levels. Many people expected ExxonMobil to cut the dividend in the fourth quarter of 2020. While they choose not to cut the dividend they did decide to keep it stagnant for the first time in over 3 decades. Personally, I would expect a dividend cut in January.

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