Morningstar

Exxon Reports Q2 Loss, but Dividend Looks Safe

We don't expect to change our fair value estimate or narrow-moat rating.

Securities In This Article
Exxon Mobil Corp
(XOM)

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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About the Author

Allen Good, CFA

Director
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Allen Good, CFA, is a director, Europe, for Morningstar*. Based in Amsterdam, he covers the oil and gas industries as well as manages a team of multi-industry analysts. He is also chair of the Morningstar Research Services Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat ratings issued by Morningstar. In this role, he is responsible for ensuring consistent application of Morningstar’s Economic Moat methodology across sectors and regions as well as updating and revising the methodology. His specialty is global integrated oils such as Exxon, Chevron and Shell and US independent refiners such as Valero and Marathon Petroleum. He also contributes to developing hydrocarbon price and petroleum product margin forecasts used in valuation models.

Before joining Morningstar in 2008, He performed merger and acquisition advisory work for a middle-market investment bank. Before that, he spent several years at Black & Decker in various operational roles, primarily focused on manufacturing and distribution.

Good holds a bachelor’s degree in business from the University of Tennessee and a master’s degree in business administration from Kenan-Flagler Business School at the University of North Carolina. He also holds the Chartered Financial Analyst® designation.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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