Summary
- Exxon Mobil announced on December 20, 2019, that oil production has commenced from the Liza field offshore Guyana.
- The company is expecting to produce up to 120K Boep/d within a few months.
- Hopefully, the extra production from this new exciting massive field will reduce some concerns about dividend sustainability.
Image: The Liza Destiny floating, production, storage and offloading ("FPSO") vessel Courtesy: Offshore Engineer Magazine
Investment Thesis
It is an exciting time for Exxon Mobil (XOM) and Hess (HES). The CapEx invested in this offshore project has been massive since 2015, and has hurt the company stock growth quite significantly.
Exxon Mobil has been one of the preferred oil supermajors that I have recommended here on Seeking Alpha, and I continue to believe that it is one of the first "oil" stocks to be held in your long-term investment portfolio. It is not my best choice, but it is a strong contender anyway.
However, to profit with Exxon Mobil, and the oil industry in general, it is crucial to adopt a tailored investment strategy. It should combine a long-term position with a minimum of one-third of your position dedicated to short-term trading to take advantage of the volatility in this cyclical sector.
In my opinion, CapEx spending has been a determining factor in the not-so-stellar performance of the stock in the past five years.
A sizeable offshore project like Guyana requires a massive cash influx and is not generating cash flow for up to ten years. It is the difference with what the company experienced in the US shale, where the sustaining capital expenditure translates immediately to cash flow. This issue is a lingering problem that will not stop abruptly in 2020.
Unfortunately, the adverse CapEx effect on Exxon Mobil's generic free cash flow may continue for a few more years and until the Guyana prospect is completed and fully producing around 2024-2025.
However, one major financial element is that the company will be able to produce cash flow from Liza Phase 1, which will reduce the CapEx burden going forward. More revenues and lower CapEx will provide more free cash flow that could better support the dividend yield and a share buyback program.
The generic free cash flow is the cash from operating activities minus CapEx.
Free cash flow (not including divestitures) has been insufficient in 2019 due to the combination of two main factors.
The first factor is a significant CapEx versus cash from operations, and second, a notable weakening of the oil and gas prices.
I consider the free cash flow for Exxon Mobil as a crucial financial indicator. As you all know, the free cash flow is what is left to pay the dividend, implement a share buyback program, and pay back the paramount debt.
There are a few different free cash flows, and I will not enter the accounting details. The most simple calculation is cash from operating activities minus CapEx. FCF yearly ("TTM") represents $8.21 billion (not including divestitures). The third quarter was a gain of $2.79 billion (according to Morningstar/YCharts).
On the other side, the dividend is now $3.48 per share annually or a yield of 4.98%.
The question: Is the dividend safe? My answer is probably not at this level, even if XOM will not cut it unless oil prices tumble in 2020 below the low $50s range.
Based on 4.271 billion shares outstanding diluted, it is a cost of ~$14.9 billion per year, which is higher than the actual generic free cash flow. A quick comparison with a few of the company's peers shows that Exxon Mobil is paying a generous dividend yield.
Note: I have added ConocoPhillips (COP) to the six oil supermajors that I usually cover on Seeking Alpha. Still, I consider COP a healthy long-term candidate despite a much weaker dividend yield.
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