Nov. 21, 2021 6:17 AM ET
Seeking Alpha
Summary
(1) It is now obvious that the dividend is in no danger.
(2) Dividend growth, if any, is likely to remain slow for the time being.
(3) Several large projects promise enhanced profitability in the future.
(4) The Guyana partnership is likely to prove to be very significant to the company.
(5) There are other large projects that promise to favorably change the company cost structure.
It was not too long ago that "everyone" seemed to think that the Exxon Mobil (NYSE:XOM) dividend was in danger. Now, all of a sudden there are hopes of a dividend increase. Exxon Mobil has long had financial flexibility to do as it wishes. Yet investors scream when any company "borrows to pay the dividend" no matter the financial strength or the total picture. Oftentimes a proliferation of panic articles and predictions marks a market bottom. That proved to be the case with Exxon Mobil. Now there is a similar ignorance of the total picture yet again to push for a dividend increase. Most likely, the dividend will increase. But that increase will be restrained by the profit opportunities offered by the company projects.
Management has noted that the company should double profits by 2025.
Far more important is the improvement in cash flow. Earnings is comfortably in the black as well. But it is now clear that the company can easily spend what it needs to develop priority projects while paying a dividend. Long term debt is a whole (roughly) $44 billion and it's declining. It was only a year ago that many wondered if the company could ever pay that level of debt. Now it is obvious that the debt level is conservative.
The lenders are also attracted to the attributes of the Guyana partnership. This kind of discovery often causes the debt market to "loosen up" at the realization of extreme profitability once this project really "gets going" in terms of cash flow acceleration.
Exxon Mobil recently announced a 21st discovery that is not shown above. That discovery, combined with the discoveries that have been added to the map, have caused the partners to raise the amount of oil to be recovered to more than 10 billion barrels.
Furthermore, this project will be generating more cash flow when the second platform begins oil production in 2022. What needs to be realized is that the partners figure the discoveries so far will support at least 10 platforms. That means that this project (at 200,000 BOD per platform) could be producing 2,000,000 BOD for the partnership sometime around the end of the decade. That is a significant quantity (even though the company only receives its share) even for a company as large as Exxon Mobil.
Yet neither the stock nor the stock of partner Hess (NYSE:HES) has really responded to the potential cash flow from that (likely) very profitable production. One of the things that the partners and a fair amount of industry have stressed is that offshore costs are currently at a cyclical low. There is therefore a permanent cost advantage to develop this project to the extent possible by using those cheap costs. Estimates of savings have varied widely. But some of those estimates of savings approach 30%. That would be a very material cost advantage for a project of this size. Low costs of large projects often turn into a competitive moat when those costs cyclically rise as the competition also completes production projects in the area.
Exxon Mobil, as the partnership operator, currently has 6 drill ships operating off the coast of Guyana. The string of discoveries announced so far suggests that there are a lot more discoveries in the future of this partnership. Should offshore costs continue to remain low, there is every possibility that Exxon Mobil would increase activity as the cash flow from the partnership rises. The potential profit opportunity of the jo--t venture appears to outweigh the opportunity to return more profits to shareholders.
But Exxon Mobil is not relying upon Guyana alone to help make the company cost structure more cost competitive. The company will be drilling some wells in Brazil (the first of which should begin drilling soon). Any large project like this can take a few years to determine the profit possibilities. But this is yet another potential game changer partnership that the company is involved with.
The company has also invested $19 billion in a primarily natural gas business in Papua, New Guinea. Natural gas prices in Asia have usually been far stronger than has the North American natural gas market. The current climate could make some further expansion plans of this large project desirable.
So much of the focus has been on low pricing and the fact that the company ran some quarterly losses in the previous fiscal year. The focus should have been that the market was unsustainably low and would have to sooner or later recover.
The dividends paid by the company have not been cut within the historical parameters shown on the company website. One would have thought that Mr. Market would have thought twice before settling on a "sure thing" dividend cut last year.
Instead, the company has maintained the dividend. The recovery came faster and stronger than expected. That unexpectedly large cash flow in the near future should allay fears about any dividends cuts for the time being.
What should have attracted attention is the below average dividend growth that has occurred for some time. Large companies like this one often go through periods of slow growth followed by periods of more growth. The projects shown above (and more on the company website) point to a period of more growth in the future.
Large projects like the Guyana partnership have already taken years to progress to the first oil flow. But now that the cash flow has begun, a large project's cash flow growth should accelerate if for no other reason than because more cash flow becomes available over time from the production growth.
The dividend history indicates a small raise to keep the history of raising dividends intact. That is a smart move when there are some extremely profitable opportunities for the company to invest in. It will be far more likely that the Guyana project (among others) will generate the cash flow necessary for sizable dividend increases in a few years. In the meantime, there is a good chance for capital appreciation when the market realizes the potential of projects like Guyana.
The slide above notes that another platform is scheduled to begin production sometime in early 2022. The next platform is scheduled to begin production in 2024. After that third platform, there will likely be enough partnership cash flow to accelerate the pace of platforms to one per year and then likely 2 per year.
Exxon Mobil already has a decent credit rating and balance sheet ratios. Those ratios will improve considerably in the current atmosphere of strong commodity prices. This is one of the few companies actually expanding production during a time of strong commodity prices.
All the worries about outspending cash flow will likely be after thoughts the way the large projects are progressing. To maintain a cost advantage it pays to expand a commodity business during times of weak pricing. That is exactly what the company did (and it caught a lot of flack for doing that). The payoff is that some very profitable projects are about to produce cash flow with low costs incurred at a time when service companies really had very few customers. The market is very likely to reward the profitability that comes from those low costs.
Wells drilled, processing plants built, and infrastructure constructed to support everything during the last few years is likely to provide a permanent competitive moat in the form of enduring low costs to be depreciated. Some of these projects will be profitable even during times of high service costs. But those projects actually executed at market tops will be at a competitive disadvantage with their higher fixed costs. In the meantime, Exxon Mobil shareholders will be laughing all the way to the bank.