Exxon Reports Q2 Loss, but Dividend Looks Safe
We don't expect to change our fair value estimate or narrow-moat rating.
Exxon (XOM) reported its second consecutive loss during the second quarter as the fallout from the coronavirus pandemic likely reached its peak. Second-quarter earnings fell to a loss of $1.1 billion from earnings of $3.1 billion last year. Operating results were actually worse, as earnings benefited from a $1.9 billion noncash inventory valuation adjustment because of rising commodity prices. Adjusted earnings were a loss of $3.0 billion compared with earnings of $2.6 billion last year.
Cash burn intensified during the quarter as free cash flow was negative $5.1 billion as Exxon generated only $1.5 billion in operating cash flow during the quarter, excluding changes in working capital, falling well short of covering capital spending and the dividend. Debt increased by $10 billion during the quarter, bringing its net debt/capital ratio to 25%, which remains manageable. Also, management does not expect to raise any more additional debt given current conditions. It is also working on identifying additional operating cost reductions beyond the targeted 15% reduction this year. Reductions in 2020 capital spending to reach $23 billion are ahead of schedule, so that fourth-quarter spending will fall to an annual run rate of $19 billion and be below that level in 2021. Management also reiterated its commitment to the dividend, which likely means the payout will not be cut, assuming macroeconomic conditions continue to improve. Exxon currently yields over 8%.
We plan to incorporate the latest results into our forecast, but do not expect a material change to our fair value estimate or narrow-moat rating. Furthermore, our thesis is unchanged.
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Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.