Despite the coronavirus pandemic causing a paradigm shift for policymakers by reviving their focus on non-conventional sources, Exxon Mobil’s (NYSE: XOM) future cash flows remain highly dependent on crude oil prices as well as high return upstream investments. Considering $50/bbl of Brent and low refining margins, the company projects its operating cash flow to increase from $30 billion in 2021 to around $35 billion in 2025, primarily driven by new upstream investments. Notably, the company is targeting projects that can generate positive returns even at a benchmark price of $40/bbl. Comparing Exxon’s 2019 operating cash flow of $30 billion with the projected figures and the stock’s recovery to pre-Covid levels, we believe there isn’t much room for growth. Importantly, the company expects to generate $30 billion of excess cash through 2025, a bit higher than the $20 billion increase in long-term debt due to dividend payouts in 2020. Our interactive dashboard analysis highlights Exxon Mobil’s stock performance during the current crisis with that during the 2008 recession.
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 77% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
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In contrast, here’s how XOM and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
Exxon Mobil vs S&P 500 Performance Over 2007-08 Financial Crisis
XOM stock declined from levels of around $94 in September 2007 (pre-crisis peak) to levels of around $68 in March 2009 (as the markets bottomed out), implying XOM stock lost 28% from its approximate pre-crisis peak. The stock remained almost stable at $68 in early 2010 and gradually recovered to its pre-crisis level by mid-2012. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.
Asset impairments slashed the company’s asset base by 10%
Exxon Mobil’s revenues declined by 37% from $290 billion in 2018 to $182 billion in 2020 as the pandemic led to a slump in demand and drove down benchmark prices. While the earnings margin fell further due to $20 billion in impairment charges, the company’s balance sheet shrunk by 10% in 2020. Improvement in the company’s finances largely depends on global crude oil demand and supply constraints by OPEC.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
While the company plans to maintain a prudent capital investment plan in 2021 to focus on long-term shareholder returns, Trefis believes that the stock has reached its near-term potential considering EIA’s expectation of lower benchmark prices during the latter half of the year.
With the oil industry gaining from the extension of OPEC curtailments, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for New Jersey Resources vs. World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.