How Has The Commodity Slump Impacted Exxon’s Shareholder Returns?

by Trefis Team
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Over the last three years, a majority of the oil and gas companies have struggled to keep up their shareholder returns due to the weakness in commodity markets. Even large integrated energy companies who have continued to increase their dividend outflows for more than 25 years in a row, have been forced to restrict their dividend growth as well as hold back their share repurchase programs in order to manage their cash flows and liquidity in the ongoing oil slump.

However, with the recent extension of production cuts by the Organization of Petroleum Exporting Countries (OPEC), the outlook for commodity markets has improved. This could cause oil majors, such as Exxon Mobil (NYSE:XOM), to increase their dividends and/or share repurchase programs in the near future. Below, we discuss how the commodity downturn has impacted Exxon’s shareholder returns over the last few years, and our expectations going forward. We currently have a price estimate of $84 per share for Exxon Mobil, which is in line with its market price.

See Our Complete Analysis For Exxon Mobil Here

Impact of Commodity Downturn

As mentioned earlier, the commodity down-cycle has taken a toll on Exxon’s profitability as well as its cash flows over the last three years. However, being a dividend aristocrat company (a company that increases its dividend consecutively for at least 25 years), Exxon could not afford to reduce or curtail its dividend payments even when the oil prices dropped to under $30 per barrel in early 2016, as it could have triggered a wave of panic and anxiety among investors and caused a massive stock sell-off. Consequently, the company decided to lower the growth rate of its annual dividend rather than cutting back on it. Hence, the company’s annual dividend grew by a little over 4% in the last three years, as opposed to a compounded dividend growth rate of more than 10% delivered in each year between 2010 and 2014.

However, the company’s plans to maintain its dividend payments came at a heavy cost. The world’s largest publicly traded oil company was forced to raise long term debt in order to finance its dividend payments, since its declining cash flows from operations were not sufficient to meet these obligations. Thus, Exxon’s long term debt, which stood at roughly $20 billion at the end of 2015, rose sharply to $30 billion by the end of 2016, taking its leverage ratio, or net debt-to-equity ratio, from under 10% to close to 15% within a year. Though the company has the lowest leverage among its peers, a higher amount of debt on its books meant higher interest obligations, which further pulled down its bottom-line, as well as cash flows.

Additionally, due to the growing pressure on the company’s cash flows, Exxon was unable to continue its extensive share repurchase program. The company had repurchased over $13 billion worth of its own shares in 2014, when the oil prices were at their peak. However, the figure dropped to less than $1 billion in 2016, as the company did not have sustainable cash flows to continue its share repurchase program. For a company of Exxon’s size, share buybacks are an important tool to improve their profitability and enhance shareholder returns. Thus, the company failed to deliver value to its shareholders through dividends as well as a share repurchase program.

Going Forward

The last three years have been extremely difficult for the oil and gas industry as a whole. However, 2017 has been a comeback year for commodity prices, as oil prices have remained above $50 per barrel for most part of the year, showing signs of a rebound. Further, with the latest OPEC meeting, wherein the cartel announced the extension of its production cuts until 2018, the oil prices have been trading above $60 per barrel. As a result, the outlook for the commodity markets has improved significantly for the next year. Being one of the largest integrated energy companies with a strong exposure to the oil markets, Exxon is well-placed to leverage the anticipated recovery in oil prices in the coming quarters. Accordingly, we expect the company’s cash flow position to improve, which should enable it to raise its dividends in the forthcoming quarters.

Exxon’s Dividend Could Grow Faster In 2018 Backed By The Oil Price Recovery

Above, we present our base case estimate (grey bars) of Exxon’s annual dividend for 2017 and 2018. We expect the company’s annual dividend to be $3.06 and $3.14 per share in the next two years. However, if the commodity prices rebound faster than expected, the company would have an incentive to raise its dividend higher than its current growth rate of 4% to reward its shareholders. In that case (blue bars), we expect Exxon’s 2018 dividend to be around $3.24 per share. You can also create your own scenarios for Exxon’s dividend expectations using our interactive platform.

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