It’s no secret the oil industry has been amongst those hit the hardest during the year of Covid-19. Industry giant Exxon Mobil (XOM) has also been unable to ward off the pandemic’s ruinous impact, as the weaker crude oil prices have taken their toll on the balance sheet.
However, with the very real prospect a vaccine might soon become widely available, the oil industry exits a miserable 2020 and enters the new year in an optimistic mood.
Nevertheless, says Raymond James analyst Pavel Molchanov, the “upbeat oil price landscape implied by the futures curve,” will not provide enough of a boost to fund Exxon’s fabled dividend without taking on additional debt – an act the company has told shareholders it will not resort to.
Which leaves the oil giant with a problem to solve. Molchanov argues there are three paths Exxon go down in working out this issue.
The first choice is to “break its pledge and take on some more leverage.” Molchanov says this option is “feasible but would cost management credibility.”
Otherwise, it could go down the radical path of cutting the dividend. Molchanov, though, does not believe this will take place – at least not over the next 12 months.
A third choice, however, appears more “plausible.” The company could “sell assets at what are likely to be suboptimal valuations and use the proceeds to support the dividend.”
Molchanov finds this to be the most “probable solution” yet calls it “hardly sustainable.”
The bullish case is further weakened by Exxon’s dwindling cash position. Exxon saw out Q2 with $12.6 billion cash on hand which by the end of Q3, was reduced to $8.8 billion, mostly due to the $3.7 billion quarterly dividend payout. The 5-star analyst believes “more outflow is on deck in 4Q.”
Therefore, the implication of keeping the dividend intact without another cash injection paints a disquieting picture.
“The lowest cash balance has been over the past five years is $3.0 billion,” Molchanov said. “Assuming that is the minimum safety level, the company could sustain, at most, one and a half additional quarters of cash outflow on par with the 3Q level before, well, running out. While 4Q is obviously not finished yet, our model points to a cash outflow of around $3 billion, which means that the year-end cash balance will be quite close to the minimum safety level.”
Accordingly, Molchanov rates XOM an Underperform (i.e. Sell) without suggesting a price target. (To watch Molchanov’s track record, click here)
The rest of the Street’s view is slightly more optimistic. In addition to Molchnov’s Sell, 2 Buys and 7 Holds coalesce to a Hold consensus rating. The $40.75 average price target suggests shares will remain range bound for the foreseeable future. (See XOM stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
