Exxon Mobil Corp (XOM) is reportedly preparing deep spending and job cuts, in a move to preserve a 8% shareholder dividend as the US oil producer grapples with a looming multi-billion-dollar quarterly loss.
The stock is down 4.5% at $42.11 in Thursday’s early afternoon trading. According to a Reuters report, the latest cost cuts are essential to preserve the company’s nearly $15 billion annual payout to shareholders in the face of rising losses. Exxon may not be able to generate enough cash from production operations to cover this year’s dividend. It borrowed $18 billion earlier this year to shore up cash reserves.
Earlier this month, the oil producer warned investors that it expects to post operating losses at its refining as well as at its oil and gas businesses in the second quarter. The fast spread of the coronavirus pandemic has curtailed energy demand as oil prices dropped over 30% this year spurring production cuts. Refining results are poised to take a hit of between $800 million and $1.1 billion compared with the first quarter as margins contracted, the company said.
The Street expects Exxon on Friday to post a $2.63 billion loss for the quarter after reporting a $610 million loss in the first quarter. Furthermore, the company’s 2019 plan to raise $15 billion by 2021 via asset sales has been hampered this year due to a slowdown in demand from potential buyers. In 2019, the sales generated about $3.7 billion but proceeds this year are only $86 million.
As energy prices are expected to remain lackluster for years, Exxon may now need to turn to spending and staff cuts, and a business restructuring to salvage the payout.
Meanwhile, Cowen & Co. analyst Jason Gabelman this month reiterated a Hold rating on the stock with a $34 price target (19% downside potential), citing fears for a very weak quarter and additional questions around its dividend policy and heightened focus on impairments.
“Given the current environment, XOM will likely need to continue defending its long-term view of energy growth that underpins its counter-cyclical capex program that could ramp back up next year,” Gabelman wrote in a note to investors, adding that it will be challenging for the company to rein in spending.
Overall, Wall Street analysts share Gabelman’s cautious outlook. The Hold consensus breaks down into 12 Hold ratings and 2 Sell ratings versus 1 Buy rating.