July 27, 2021

Retirement Strategy: Exxon Mobil – When Are The Rewards Worth The Risk (NYSE:XOM)

I won’t pull any punches here. The last article on Exxon Mobil (NYSE:XOM) I wrote was not very positive. I had owned XOM for decades, and I was not thrilled about bringing my opinion on the dividend to your attention. As any decent investors knows, when the facts change, then you must be flexible to change also.

It is possible that, in retrospect, I might have waited before writing that piece.

Don’t misunderstand, it was completely factual, and at that moment in time, I felt the need to let my followers know my own opinion. After all, that is what Seeking Alpha is all about right? Using facts to formulate an opinion and offer suggestions on actions to consider.

Well, as of today, XOM has reached an inflection, or tipping, point. Not because the price of oil has gone up, nor has the any of the harsh headwinds diminished one iota. As a matter of fact, if anything, the news has even gotten worse.

Terrible Earnings Are Foreseen

XOM itself came out with a heads-up that the next earnings report will be absolutely miserable.

Exxon gave a preview of its earnings results as it has been doing every quarter, noting areas where it expects to see improvements or declines from the prior quarter.

In production, rising oil prices are helping results, but gas prices are hurting. All told, the preview points to a production loss of $500 million at the midpoint, noted Tudor, Pickering Holt analysts.

Weak prices for refined products are also hurting Exxon, according to the release. Compared with the second quarter, lower refining margins could hit earnings in that segment by $200 million to $600 million….. All told, the release points to disappointment ahead. Tudor, Pickering estimates that the company could post a loss of 30 cents a share, versus analysts’ expectations for a loss of one cent a share.

This is an alarming heads-up! A loss of $0.30/share versus analysts’ estimates of just $0.01/share? My goodness, that is not fun to read. It also added this:

The big question for the months ahead is whether Exxon will try to cut expenses further to make sure it can pay its current dividend without having to take on new debt. The company had said after its second- quarter release that it doesn’t intend to add debt in the near future. Its dividend yield is now 10.5%, implying skepticism on Wall Street that it can maintain the payout at current rates.

In my previous article, I noted four choices the company had to hopefully maintain its dividend and aristocrat status:

  • Cut costs, including current projects.
  • Drastically reduce the number of employees.
  • Cut or stop paying the dividend.
  • Take on more debt.

All options are still on the table. However, since it was noted above that the company will not add debt, then what is left? The capex has been cut to the bone, and employees are going to be laid off. The only option for the company to take to turn things around is to absolutely cut the dividend. I know that, for long term XOM shareholders, that is bitter news and hard to accept, which is why I suggested switching the stock for various other solid dividend stocks like AT&T (NYSE:T) and/or Altria (NYSE:MO). I even suggested some high yield “opportunity” stocks to soften the blow, such as Annaly (NYSE:NLY) and or AGNC (AGNC).

Two dividend aristocrats that I believe will be just fine and two mREITs with yields over 11% but not quite as reliable. For the short term, the mREITs do offer an opportunity.

Here is another article that offers the recent “bad” news. It states this:

For the second quarter, Exxon reported at the end of July its second consecutive quarterly loss, which was the worst loss for the U.S. supermajor in its modern history.

Exxon booked a loss of US$1.1 billion for the second quarter due to the global oversupply and COVID-related demand impacts. This compares with earnings of US$3.1 billion for the same period last year.

Exxon’s total revenues more than halved to US$32.6 billion for Q2 2020 from US$69.1 billion a year earlier, highlighting the pain that oil companies suffered during one of the worst quarters for the industry ever.

All Of This Said, Something Has Changed, Big Time

Look at this chart from just about the time of the last article to today, 10/01/2020:

ChartData by YCharts

The share price has dropped precipitously by just about 10%. That is not a dip, that is “fear personified” by investors who are taking action and exiting the stock. With this drop in share price and market value, I now believe, in my humble opinion, that the bad news has been priced in and has left an extremely wide gap between the price and the book value of the entire company.

Let’s have a look at what book value is and what this gap might mean:

Book value per common share (or, simply book value per share – BVPS) is a method to calculate the per-share book value of a company based on common shareholders’ equity in the company. The book value of a company is the difference between that company’s total assets and total liabilities…..Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.

Key Takeaways

  • Book value per common share (BVPS) calculates the common stock per-share book value of a firm.
  • Since preferred stockholders have a higher claim on assets and earnings than common shareholders, preferred equity is subtracted from shareholder’s equity to derive the equity available to common shareholders.
  • If a company’s BVPS is higher than its market value per share, then its stock may be considered to be undervalued.

With this fact now apparent, all we need to do is look at the percentage difference between what the book value is compared to share price and calculate that gap percentage:

Just about a 20% difference between share price to book value! For XOM! In my mind, if the company were to cut the dividend by, let’s say, 50%, that gap will close immediately, and Wall Street will like it.

The cut will hurt current long-term shareholders, but for new or added positions, I believe that there is at least a 20% potential capital gain, and if the dividend is cut in half, it will still yield, at current prices, about 5.25%.

On the other hand, if the dividend is not cut, new shareholders or added shares will be buying XOM at bargain basement prices, that aside from this past March has not been seen for nearly 25 years.

Source: Fidelity

I see this as a potential opportunity, and as of today, while I am not diminishing the problems of the company, I am considering it a buy at these levels, or even lower if it drops further. If it were me, I would consider opening a separate bucket of new shares if I already owned it, and ease into the stock slowly, while the bad news continues to unfold.

I have no idea what more bad news could be aside from a significant cut in the dividend, or massive sales of assets. No, I wouldn’t wait for any further announcement, simply look towards that price to book value gap as an opportunity for the near term, and if all gets a bit better, long term at 5.25% yield is not bad for a dividend growth stock basically starting over!

It is your choice and is definitely a higher risk play, but I believe the rewards could be worth the risk.

The company would be desirable at cheap prices and a solid yield for the new shares. If I am wrong, well, there still is the 20% gap in price to book value, plus the ridiculous 10.50% dividend yield it still has.

My Bottom Line

Will XOM go out of business? I doubt it, but even if it does, the book value of about $21/share would be what shareholders would be left with (preferred shares are first, of course). I just do not see that happening. The company has over 70,000 employees and major footprints globally, so my thesis should be considered.

If you have enough cash on hand, you also might want to consider selling put options, not far out, that you can also pocket the premium as well as getting the stock at an even cheaper share price if it gets assigned. Find out from your brokerage firm if you are eligible to trade options in this very basic way.

Take a peek at this put option chart that is very near term:

Source: Fidelity

You would immediately pocket the premium currently at $0.40-0.42/share. The option runs for just 15 days, and the price that the shares would be assigned would be $31/share. If not assigned, the premium is still yours.

This is my “new” opinion. Let everyone know what YOU think!

Not To Bore You, But…

Knowledge is power, and many folks shy away from the investing world because that very world makes it more confusing each and every day in an effort to sell you something.

My work here will remain free to all of my followers (unless it is an Editor’s Pick! Then, the article will be openly available for only 24 hours or so. But I have no Marketplace service). My hope is that I’ll give you some of the things that took years for me to learn myself.

One final note: The only favor I ask is that you click the “Follow” button and become a real-time follower to receive emails that my articles have been published, and so I can grow my Seeking Alpha friendships. That is my personal blessing in doing this and how I can offer my experiences to as many regular folks as possible who might not otherwise receive it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author used in his past worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance. One more thing…I have no equities since I divested everything about 2 years ago due to very serious health issues and my personal circumstance.

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