Oil major ExxonMobil could require $8 billion of debt financing to maintain its 2021 dividends, concludes a recent research note.
John Gerdes, a managing director at MKM Partners, observed that amount would increase the company’s leverage by about 12 per cent but calls it manageable. As of September 30, the integrated major energy company’s debt totaled $68.8 billion, up from $47.1 billion a year earlier.
Still, the market is concerned about the dividend’s health as evidenced by a recent yield of 9.9 per cent even as stock has returned about minus 45 per cent this year, but it’s up about 5 per cent in the past month.
Exxon Mobil, which has struggled with weak energy prices and the pandemic, said recently that it will maintain its quarterly payout at 87 cents a share. If that holds, it would mark the first year in which the global energy company hasn’t raised its payout since calendar year 1982.
“We are looking to increase divestments and working to maintain the dividend while holding gross debt at second-quarter levels,” Exxon Mobil CFO Andrew Swiger said during the company’s third-quarter earnings call October 30. Gross debt stood at $69.5 billion as of June 30, $700 million higher than it was after the third quarter.
To reach his conclusion on the amount of debt Exxon could need to fund its dividend, Gerdes used a scenario in which West Texas intermediate oil prices are at about $47, a few dollars higher than recent levels.
He calculates that the company would need an additional $8.4 billion to fund the dividend next year, though any asset sales would lower that amount. Gerdes expects the company will further reduce capital spending to help save cash.
Swiger said during the call that the company’s plans “have a modest amount of asset sales in there.”
Looking on the bright side and assuming a WTI price of around $55 a barrel, Gerdes calculates the company should grow its cash flow per share about by about 2% annually from 2022 to 2025 and be able to fund its dividend internally.
But he cautions that his forecasts would come under pressure “if we are in the same place we are now a year out.”