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As Exxon Mobil Corp. works on a plan to cut costs, investors are pondering whether Exxon and Chevron Corp. are going to forgo paying dividends for the first time in decades.
Exxon XOM, +3.77% and Chevron CVX, -1.50% are the only two oil companies on the list of S&P “dividend aristocrats,” or companies that have increased their dividend every year for at least 25 consecutive years.
Exxon has increased its dividend each year for the last 37 years, and Chevron’s streak is almost as long, said Pavel Molchanov, an analyst with Raymond James.
“It would be virtually unthinkable for either of them to cut the dividend,” he said.
On the heels of a debt-rating downgrade on Monday, Exxon late Monday said it is “looking to significantly reduce spending” in the near term as it struggles with the fallout from the novel coronavirus pandemic and steep commodity-price decreases.
A plan is expected to be finalized soon, the company said. Exxon shares rallied on the news and carried on trading higher on Tuesday.
The shares gained nearly 8%, putting them on pace for their largest one-day increase since November 2008. The stock is off about 55% from a 52-week high of $83.38 hit on April 23.
S&P Global Ratings lowered its ratings on Exxon debt one notch to AA saying that the oil giant’s cash flow has fallen “well below” expectations.
“What every oil producer is currently focused on, as the first line of defense, is cutting capital spending: in many cases, quite sharply, by 30% or even more,” Molchanov said.
Reductions in corporate costs, including layoffs, are likely, but the main driver will be to slow drilling activity and postpone projects, Molchanov said. Several companies have already announced capital expenditure cuts.
Among the latest to announce cuts were Hess Corp. HES, +3.29% and Pioneer Natural Resources Co. PXD, -3.18%. Earlier Tuesday, Hess announced a 27% reduction in its 2020 capital budget to $2.2 billion from $3 billion, with most reductions taking place in the U.S.
Pioneer late Monday revised its 2020 outlook and reduced its 2020 program to “maintenance mode” with total capex just under $2 billion.
That “preserves the company’s strong balance sheet and generates free cash flow allowing PXD to weather the down cycle and emerge stronger as the environment improves,” analysts at SWS Equity Research said in a note Tuesday.
The spread of the COVID-19 illness on oil demand combined with price wars among major producers has been nothing short of devastating.
Molchanov has called for NYMEX-traded crude-oil prices to test levels as low as $20 a barrel in the second quarter of 2020 before a rebound in the second half of the year to end the year around $45.
Analysts at Goldman Sachs said in a Tuesday note they believe London-traded Brent crude prices are likely moving toward $20, $30 a barrel through third quarter 2020 before bouncing back to $53 a barrel by next year. Refiners, which would buy the lower-priced oil, would be hit nonetheless due to demand weakness, particularly for jet fuel and gasoline.
The Goldman analysts rate Exxon a sell, and continuing with their long-standing preference, shared by many analysts, prefer Chevron over Exxon.
“Among majors, we highlight large caps” such as Chevron, ConocoPhillips COP, -0.02% and Suncor Energy Inc. SU, -5.40%, “where the strong balance sheets should enable companies to get to the other side of the OPEC/demand-driven downcycle in a position of strength,” they wrote.
CFRA analyst Stewart Glickman said that Exxon could try to increase its cash flow with proceeds from non-core asset sales, although that could also be difficult.
Exxon recently guided for capital spending plans of $32 billion a year through 2021, and when combine with estimated dividends around $15 billion a year, “we think would now significantly exceed operating cash flows (and thus induce XOM to borrow to protect the dividend,” he wrote in a recent note.
