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Losses Continue for Exxon in Q3; Dividend Is Safe

Despite three consecutive quarterly losses, we're maintaining our $74 fair value estimate and narrow moat rating.

Exxon XOM reported its third consecutive quarterly loss, as the COVID-19 pandemic continued to weigh on commodity prices. Third-quarter adjusted earnings fell to a loss of $793 million from adjusted earnings of $2.9 billion last year, but improved from a $3 billion loss in the second quarter. 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.

Exxon returned to generating free cash flow during the quarter, as $4.5 billion in operating cash flow and proceeds from asset sales exceeded $3.8 billion in investments. Free cash flow was insufficient to cover $3.7 billion of quarterly dividends, though, requiring use of cash on hand and increasing net debt even though gross debt fell slightly. Leverage remains manageable, however. The sustainability of the dividend remains the key near-term question for Exxon shareholders as continued share price decline has the yield just under 11%. Management reiterated the dividend but did without any growth this year, keeping the quarterly payout at $0.87 a share.

The dividend appears safe for now, with management stressing its commitment to providing a reliable growing dividend. It believes that the dividend is safe through 2021 with its latest capital plan (reduction in capital spending to $16 billion-$19 billion) and operating expense reductions without increasing debt, assuming a recovery in market conditions for oil and gas prices and refining and chemical margins to the low level of the past 10 years. During the third quarter, oil prices were slightly below those levels, while natural gas prices and downstream margins were well below those levels. Assuming a continued economic recovery, then, the dividend should remain safe.

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