Exxon Mobil (XOM): Safe Haven For Oil Dividend Investors During The Oil Crash

Exxon Mobil (XOM) is the ultimate blue chip stock in the oil patch, but even it hasn’t been spared the carnage of what’s being called the worst oil crash in nearly 50 years.

So naturally, many conservative investors living off dividends are wondering how safe this legendary oil giant’s dividend really is.

Let’s take a look at why, and how, Exxon plans to ride out this oil storm, and not just maintain the current payout, but also continue growing it as it has for over a third of a century.

Business Description

Exxon Mobil is the world’s largest publicly traded integrated oil company, meaning it profits from extracting value from every stage of oil production, refinement, and transformation into specialty petrochemicals.

Exxon Mobil

Source: XOM Investor Presentation
During the first half of 2016 the company produced the equivalent of just over 4.1 million barrels per day of oil, 58.8% of that in the form of higher margin liquids, such as crude oil, and the remainder in the form of natural gas. To put that in perspective, if Exxon Mobil were a nation, it would be the fifth largest oil producer on earth; ahead of Canada, Iran, Kuwait, the UAE, and Venezuela.

Exxon Mobil

Source: US Energy Information Administration
What’s more, with 25 billion barrels of proven oil reserves, Exxon would hold the 14th largest reserves of any nation on earth; more than Mexico, and Brazil combined.

Exxon Mobil

Source: CIA World Factbook
During the first two quarters of the year Exxon’s refineries produced 4.2 million barrels per day of gasoline, diesel, and jet fuel, much of which made up the 5.4 million barrels per day of refined oil products Exxon Mobil sold around the globe via its diverse network of gas stations.

Finally, as one might expect, Exxon’s specialty chemical division is equally massive, producing 12.5 million tons of high-margin petrochemicals in the first half of 2016. The chemical division is helping to offset much of the financial pain through this most challenging of energy markets.

In fact, thanks to how low oil prices have fallen, actual oil production made up the smallest contribution to the company’s earnings during the most recent quarter.

Business Segment Segment Earnings % of Earnings
Upstream (Production) $294 million 17.3%
Downstream (Refining) $825 million 48.5%
Chemical $1.217 billion 71.6%
Corporate -$636 million -37.4%
Total $1.7 billion 100%

Source: XOM Q2 2016 Earnings Factsheet

Business Analysis

The key to Exxon’s long-term investment thesis is its world class management, led by CEO Rex Tillerson, who has been with Exxon since 1975 when he began working as a production engineer.

Over his 41-year tenure, Tillerson has lived through numerous boom bust cycles in the energy industry and has helped to instill a highly conservative and hyper-efficient corporate culture at Exxon.

Exxon Mobil’s integrated business model also enables it to react more effectively, efficiently, and quickly to changes in the business environment. The company’s diverse asset base provides market optionality and operational flexibility while allowing Exxon to optimize profits throughout various commodity cycles better than most of its peers.

The company’s scale further helps it maintain lower costs than its peers. For example, Exxon’s Downstream and Chemical businesses generated over $50 billion in earnings over the last five years, nearly twice as much as its nearest competitor.

Exxon Mobil’s return on capital employed averaged 18% over the past five years, which is close to five percentage points higher than the next closest competitor as well. Management has done an excellent job allocating capital to create economic value.

Looking ahead, the company’s massive resource base of 91 billion oil-equivalent barrels provides sold visibility. Exxon has a long reserve life of 16 years at current production rates, which leads all competition.

Perhaps more importantly, Exxon’s track record of profitably replacing its resources is outstanding. Like clockwork, Exxon has added around 1.5 billion to 2 billion oil-equivalent barrels of resources to proved reserves each year, replacing more than 100% of production for more than two decades.

Under Tillerson’s guidance, Exxon has consistently produced the lowest costs and highest margins of any of its integrated oil major rivals.

Exxon Mobil

Exxon Mobil

This combination of laser-like focus on cost controls, along with the best economies of scale, have resulted in an impressive track record of industry leading profitability.

Exxon Mobil

Better yet, management is well aware that Exxon’s shareholder base is dividend and dividend growth focused. And since this is a highly cyclical industry, the key to long-term dividend growth over time is using the windfall profits of the boom times to return capital to shareholders in the form of large buybacks that bring down the share count over time.

Exxon Mobil

By reducing the share count by 2.6% per year over the past five years, Exxon decreased its dividend burden and helped keep the payout ratio, allowing for more secure dividends during the lean times. Better yet, it also helps Exxon to generate far better long-term dividend growth than its rivals.

Exxon Mobil

Overall, Exxon’s capital discipline, quality assets, integrated operations, diverse resource base, and scale will continue to serve the company well for many years to come.

Key Risks

There are four key risks to be aware of when investing in Exxon.

First and foremost, never forget that oil & gas prices are highly volatile and cyclical in nature. And as this oil crash has showed us, no one can predict the short-term fluctuations of energy prices, or how long they might remain low.

While management has shown itself the best in the world at cutting costs and squeezing out maximum profitability from its assets, there is only so much cost cutting that can be accomplished in a sustainable fashion. After all, oil fields naturally decline in production over time and require a minimum amount of maintenance investment to keep the oil flowing.

So the largest risk to Exxon is that oil & gas prices remain at suppressed levels for several more years. Ironically, this risk is increased because of the very efficiency gains that Exxon and its rivals have accomplished in the last few years.

For example, thanks to new and improved fracking technology, such as more advanced drilling rigs, horizontal drilling, longer laterals, more fracking stages, and increased use of frack sand, production costs have fallen to levels that allow cash flow break even at much lower oil prices than previously believed possible.

Exxon Mobil
Exxon Mobil –

And thanks to over 3,900 drilled but uncompleted, or DUC (i.e. not yet fracked), wells in the US, shale producers could very quickly ramp up US production once oil prices rise even a little.

Exxon Mobil
Exxon Mobil

In fact, in the last few months, when West Texas Intermediate, the US oil standard, rose above $50 per barrel, we’ve seen a surprising number of rigs once more

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