Updated March 16, 2021 by Bob Ciura
A long history of dividend growth is not typical in the energy sector. The oil and gas industry is very cyclical, which often prevents companies from increasing their dividends uninterruptedly every year. When oil and gas prices are high, energy companies enjoy a windfall that flows to investors. But when commodity prices fall, profits evaporate, and in some cases dividends, too.
As a result, only two oil and gas stocks are on the Dividend Aristocrats’ list. One of them, Exxon Mobil (XOM), is the largest oil company in the United States
You can download the full list of all 65 Dividend Aristocrats with key metrics like dividend yield and price / earnings ratio by clicking the link below:
Oil and gas can be a boom-and-bust industry. Profits depend heavily on raw material prices, which can fluctuate sharply every year depending on supply and demand forces.
But Exxon Mobil is different. It has its roots in Standard Oil, which was founded in 1870 by John D. Rockefeller.
With a dividend yield of 5.9%, Exxon Mobil is on our list of high-yielding stocks. This article provides an in-depth look at Big Oil founder and dividend aristocrat, Exxon Mobil.
In its early days, Standard Oil dominated the US oil and gas industry. It did so with a laser-like focus on drilling innovation, production growth, and cost containment to beat the competition. Standard Oil was almost too successful – it grew so fast that it was dissolved by the US Supreme Court in 1911 on antitrust grounds. Standard Oil was split into 33 smaller companies, many of which became giants in their own right, such as Chevron (CVX).
The company operates three major business areas. The upstream segment includes the exploration and production of oil and gas. Downstream activities include refining and marketing. Chemicals produced include olefins, aromatics, polyethylene, and polypropylene.
2020 was a difficult year for Exxon Mobil and the entire energy sector due to the coronavirus pandemic, which had a negative impact on the global economy and oil prices. In early February, Exxon reported (02/02/21) financial results for the fourth quarter of fiscal 2020. However, total production remained unchanged sequentially due to OPEC quotas. On the positive side, margins in chemicals have improved and this segment has achieved the best results in 2 years.
As a result, Exxon went from adjusted loss per share of $ 0.18 in the third quarter to adjusted earnings per share of $ 0.03 in the fourth quarter. By investing in higher quality projects, Exxon Mobil can generate profit even in an environment of stagnant oil and gas prices.
The climate for large oil and gas companies remains challenging as oil prices are still nearly half their 2014 high. As a result, oil producers cannot rely on rising prices for sales and earnings growth. Instead, increasing production will be key. Thanks to its promising growth projects, Exxon expects to increase its production from approximately 4.0 to 5.0 million barrels per day by 2025.
The Permian will be a major growth driver as the oil giant has around 10 billion barrels of oil equivalent in the region and will produce more than 700,000 barrels per day in the region by 2025. In the fourth quarter of 2020, production in Permian is expected to grow by 42% compared to the same quarter of the previous year.
Source: Investor Presentation
Guyana, one of the most exciting growth projects in the energy sector, will be Exxon’s other major growth driver. The company has almost tripled its estimated reserves in Guyana from 3.2 billion barrels in early 2018 to nearly 9.0 billion barrels now.
Management has stated that 90% of the new reserves have a cost of production of $ 35 per barrel, so it considers the dividend profitable with Brent prices above $ 45. However, we believe the dividend will come under pressure if the pandemic goes beyond this year. Overall, we expect Exxon to grow earnings per share an average of 8.0% per year over the next five years over the medium cycle.
Competitive advantage and recession performance
Exxon Mobil enjoys several competitive advantages, most notably its enormous size, which enables it to cut costs during difficult times.
It also has the financial strength to invest heavily in new growth opportunities. The company has spent tens of billions of dollars in investments over the past several years to support future growth.
Another competitive advantage is Exxon Mobil’s industry-leading track record. It has an AA + credit rating which helps keep the cost of capital down.
Exxon Mobil’s integrated business model enables the company to remain profitable even in recessions and times of low commodity prices. The company experienced volatility during the Great Recession but remained profitable:
- 2007 earnings per share of $ 7.26
- 2008 earnings per share of $ 8.66, up 19%
- 2009 earnings per share of $ 3.98, down 54%
- 2010 earnings per share of $ 6.22, up 56%
By consistently generating steady profits, Exxon Mobil has continued to increase its dividend each year. Exxon’s streak of dividend hikes could be at risk if oil and gas prices continue to decline. For its part, the company remains committed to dividends as a top priority in its capital allocation program.
Valuation and expected return
Exxon’s industry is very cyclical. The results are determined by raw material prices and are therefore very volatile. We believe the energy market is now at the end of its cycle and expect it to rebound this year. To calculate future returns, we used mid-cycle earnings per share (5-year average) of $ 3.26 as the basis.
With earnings per share of $ 3.26 for 2021, that’s a price-earnings multiple of 18.1. This is extremely unfavorable compared to our fair value estimate of the 13x result. A declining multiple could lower the annual return by -6.4% over the next five years.
As shown above, Exxon Mobil could deliver significant earnings growth even with modest increases in natural gas and oil prices. In fact, we expect the company to achieve 8% annual EPS growth. Of course, a lot of it depends on the direction of oil and gas prices, which are difficult to predict.
Dividends increase shareholder returns. Exxon Mobil has increased its dividend for over 30 straight years and is a high-dividend stock that has a 5.9% yield.
The expected earnings per share growth of 8% and the dividend yield of 5.9% result in an expected total return of 7.5% per year through 2026. This is a satisfactory return for a hold recommendation due to the high dividend yield, but not a to buy this time.
Exxon Mobil has struggled in recent years to show that it is vulnerable to falling oil and gas prices. However, over that period, it has outperformed many other energy stocks by maintaining its dividend and balance sheet.
Weak commodity prices continue to be a challenge, but Exxon Mobil has many promising new projects nearing completion and is still generating enough money to keep the dividend going. As a result, Exxon Mobil stock appears to be a strong position for high-income investors due to its high dividend yield.
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