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Exxon Plans to Maintain Dividend in 2021 Contingent on Businesses Getting Back to Normal Cycle Lows

Exxon maintained its dividend for the fourth quarter despite reporting another set of weak earnings results this morning.

While Exxon's operating cash flow improved from $0 in the second quarter to $4.4 billion last quarter, the firm remained far from covering its capital expenditures ($3.8 billion) and dividend ($3.7 billion).

Despite this ongoing cash flow deficit, management's 2021 capital allocation priorities have not changed and include "paying a reliable dividend."

In order to support its capital allocation plans and the dividend, Exxon said it expects and needs its businesses next year to get back to the bottom of their 10-year ranges for pricing and margins.

As you can see, the pandemic has caused all of Exxon's businesses to uncharacteristically experience pricing and margins below their 10-year ranges at the same time.
Source: Exxon Earnings Presentation
Exxon's base plan for 2021 assumes a gradual economic recovery and modest commodity prices consistent with third-party estimate ranges.

Coupled with the industry's mounting losses, reduced investment spending, project cancellations, and capacity rationalizations, management believes today's depressed market conditions are unsustainable and will eventually improve.

However, management acknowledged that "all bets are off" should current operating conditions persist through next year. 

If the energy demand recovery appears likely to be pushed out beyond 2021, then Exxon will probably be forced to cut its dividend to protect its balance sheet, perhaps by the middle of next year.

Management said their plan has some "contingency and flexibility" but made it clear that taking on additional debt is not part of the equation.

Exxon's $9 billion of cash can only take the company so far if it continues burning through a couple billion dollars per quarter. However, the company's cash reserve could get a lift from asset divestitures.

Exxon's 2021 plan calls for only a "modest" amount of asset sales, but the company has an active $15 billion divestment program that management is evaluating expanding.

This program could grow to include Exxon's North American dry gas assets which have a carrying value of $25 billion to $30 billion. Management said they are assessing their development plans for this business and expect to reach a decision in November.

Exxon can't shrink its asset base and investment levels forever as this is a depletion business, but the firm's deep cost cuts, spending reductions, and portfolio pruning are helping it weather the storm while still holding production flat in 2021.

Overall, Exxon's latest earnings report hasn't changed our outlook for the stock, which we discussed in greater detail last month.

We continue to believe today's energy market conditions are unsustainable, though it is anyone's guess regarding the timing of a stronger recovery. The growing wave of COVID-19 infections hasn't made those forecasts any easier.

With so much bad news already in the stock price and skepticism continuing to swirl around the sustainability of Exxon's dividend, it's hard to imagine how the short-term outlook could get significantly worse from here.

Given our belief that fossil fuels will remain a core component of the world's energy mix, we think Exxon's upside potential outweighs its downside risk as we await signs of an eventual recovery.

We plan to keep holding our shares to see how the future unfolds. As always, we will continue providing updates as necessary. 

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