An Oil Giant In Crisis

Goldman Sachs downgraded ExxonMobil’s shares to Sell from Neutral, following another disappointing quarter.

Exxon reported a drop in profits on Friday for the fourth quarter, weighed down by a deterioration in nearly every segment. Oil prices were weak, natural gas prices fell sharply, while profit margins for refining and petrochemicals also deteriorated. “There’s no doubt that 2019 was a challenging year for a number of our businesses,” Exxon CEO Darren Woods admitted to shareholders and analysts on an earnings call on January 31. “Near or at 10-year lows on price and margins for gas refining and chemicals. Fourth quarter was particularly challenging for our chemical business.”

It isn’t just 10-year lows for prices. Exxon’s share price is also at its lowest point in a decade. Meanwhile, ExxonMobil is not slowing down, spending at aggressive levels as it drills in the Permian and tries to ramp up its oil discoveries in Guyana.

As a result, the financial picture has darkened. Goldman slashed its price target for Exxon’s shares to $59, down from $72 previously. The bank’s analysts see “downside to long-term consensus estimates,” and a “lack of free cash flow limiting capital returns.” Ultimately, there is a “risk to long-term return on capital employed targets,” Goldman analysts warned. Exxon’s return on capital employed could end up being about half of what Exxon is aiming for by 2025.

Often, there are mixed reactions from industry analysts. But the rather gloomy take on Exxon from so many different corners of the financial world was notable. “Shareholder returns are poor, and debt is rising in a way that suggests that attractive dividends yields are unsustainable,” Paul Sankey of Mizuho Securities USA LLC said in a note to clients. “What is so concerning about these mega-oil results is that they come in a quarter that featured an average $62/bbl Brent price.”

“Lower cash flow combined with heavy capital investment led to negative free cash flow and a rise in debt that exceeded our expectations for the year,” Moody’s Investors Service Inc. analyst Pete Speer said in a note. “These trends continue to pressure the company’s credit metrics as captured in our negative outlook.”

Exxon hiked its dividend again in order to satisfy shareholders, but its share price fell anyways. Exxon has not been able to finance its dividend and share buybacks with cash generated from its operations for a very long time. Over the past ten years, Exxon dished out $202 billion to shareholders in the form of buybacks and dividends, but only generated enough money to cover about two-thirds of that payout, according to a recent report from IEEFA. Exxon financed the remaining 30 percent of those distributions from asset sales and debt.

Those numbers worsened substantially last year. “In fact, the company’s deteriorating financial condition required it to cover 64% of the dividends in 2019 with funds from asset sales and borrowing, a sharp increase from its 10-year average of 30%,” IEEFA analysts Tom Sanzillo, Kathy Hipple and Clark Williams-Derry wrote in a commentary.

“It is a dividend that requires crutches,” the analysts said. “The company continues to bring new reserves to market at the wrong time and wrong price.”

ExxonMobil would need oil prices to trade at about $100 per barrel in order for the company to pay for all of its spending and also cover shareholder payouts, according to Citigroup. Needless to say, that is far higher than the prevailing oil price today, and few, if any, oil market analysts see triple-digit oil prices anytime soon.

“We can expect ExxonMobil to stay around but as a far smaller financial and production player,” IEEFA analysts wrote.

When asked about the quarterly numbers on Friday, CNBC’s Jim Cramer was even less charitable. “I’m done with fossil fuels,” he said. “They’re done. They’re just done.”


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