Exxon Mobil: Safest Dividend Bet?

Dividend investors should be cautious about China's big 3 and U.S.'s big 2

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Jan 25, 2016
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“Dividends in danger at China’s big three oil majors,” wrote Barron’s Saturday.

Barron’s: “CNOOC has an attractive 8.9% dividend yield. But if Brent stays below $40 a barrel, the company could generate only about 50 billion yuan in operating cash flow this year, estimates Barclays, which warns: 'If CNOOC records a net loss, it may even suspend the dividend despite its strong balance sheet.'”

Sinopec and PetroChina also have sizable dividend yields of 6.1% and 4.7%, but those companies aren’t doing any better.”

Link to Barron’s is here.

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This made me think whether or not big oil in the U.S. would be in the same dividend problems in comparison. The top two (Exxon Mobil [XOM] and Chevron Corporation [CVX]) U.S. oil companies have $319 billion and $157 billion in market capitalization as of Jan. 24.

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Using simple financial ratios and numbers, I want to see who reigns supreme among the companies mentioned above in terms of their profitability and dividend sustainability despite the oil downturn.

The numbers:

Important to take note, Exxon CEO Rex Tillerson stated in a December 2014 CNBC interview that “We test across a range all the way down to $40 and up to $120" when referring to being successful in different oil price levels.

Link to the interview is here.

The price per barrel of oil has dropped considerably since then.

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For WTI Crude Oil (Nymex).

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For Brent Crude (ICE).

The numbers (10-year past performance; the Chinese yuan was already converted to U.S. dollars at 1 CNY = 15 cents exchange rate)

Revenue in millions

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The revenue chart (2005-2015) showed that China Petroleum & Chemical (SNP, Financial) has overtaken Exxon in recent years (2014 to present) in terms of making more revenue. Other than that, revenue peaked in 2012 and has declined since.

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Revenue growth hasn't been this bad since the Great Recession. When placed side to side with WTI Crude price, there seems to be a pattern in revenue growth. Interestingly during the 2012-2014 period no consistent revenue growth was observed in any of the companies despite relatively stable oil prices; revenue growth stayed flat.

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Interestingly, China’s big oil companies had shown more growth in revenue compared to the two U.S. stalwarts for the past decade (2005-2015).

Profits in millions

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The profit chart above showed that these five companies are at their lowest ever performances (except for China National Offshore Oil [CEO]), even when compared to the recent Great Recession.

Dividends in millions

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No doubt that the two U.S. companies have provided more dividends when compared to their China counterparts.

Isolating the U.S. and China’s dividend performances gave me these charts:

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And

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Exxon remains at the top in terms of providing its shareholders their dividends, whereby it provided a 2.93% increase in 2015 despite the already low oil prices. Further, China oil companies have a fairly steady growth compared to the more observable dividend growth in the U.S.’s big two.

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PetroChina (PTR, Financial) had a remarkable 50% reduction in its dividends in 2015; this event supports the fact that PetroChina can definitely lower or completely eliminate its dividends whenever necessary. No data was available yet for China National Offshore Oil’s 2015 dividends.

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*China National Offshore Oil is computed in a nine-year period instead of 10.

China Petroleum & Chemical, chart above, showed the most growth for the past 10 years despite a 15% reduction in dividend allocation in 2015.

Dividend payout ratio

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This single dividend payout chart made me think about the dividend safety of my Chevron shares. (I hold both Chevron and Exxon). This chart revealed that these big oil companies are paying almost all of their earnings to their shareholders, despite PetroChina's and China Petroleum & Chemical’s massive dividend cuts in 2015.

Breaking it down, dividend payout ratio had never been this high even when compared to the recent Great Recession. On the group’s average, 2015’s payout ratio was almost at 100% of the group’s 10-year average.

Interestingly, Exxon’s payout ratio was at the group’s lowest in 2015 at 59%. The group’s average payout ratio in 2015 (excluding China National Offshore Oil-missing data) was at 80.9%.

Share buybacks in millions

Share buybacks have been a little controversial lately, especially after Reuters published an interesting article titled, “Stock buybacks enrich the bosses even when business sags.” See the article at this link.

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Interestingly, none of the companies practice buying back shares religiously except for Exxon. Chevron had a lumpy repurchase schedule, but Exxon had been buying back shares over the past decade with not less than $10 billion annual allotment until 2014.

Total payout ratio (including share buybacks)

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Usually I demand <70% total payout ratio. Nevertheless, Exxon and Chevron’s 2015 payout ratio were already hovering at the 91% and 93%.

Looking at the past decade revealed that Exxon has been able to manage its shareholder returns (that is dividends and buybacks) better in 2015 compared to the 142% payout in 2009. In contrast, Chevron’s 2015 payout had underperformed its 2009 performance.

Some more numbers:

Total debt in millions

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This table revealed that the two China companies (ChinaPetro and China Petroleum & Chemical) had remarkable appetites in borrowing money since 2008. Otherwise, all five companies had been increasing their debts over time.

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Interestingly, all five companies met my <0.5 requirement with the debt-to-equity ratio.

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Isolating the U.S. and China’s ratios revealed both Exxon and Chevron had beenramping up their debts since the peak revenue year of 2012.

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In China, both PetroChina and China National Offshore Oil had been increasing their debts for some time now, from 2008 and 2010. China Petroleum & Chemical showed a little decline, but most in 2015.

*Total debt data was only up to 2014. China Petroleum & Chemical may have significantly reduced its borrowing in 2015.

Total cash in millions up to 2014

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This table revealed Exxon has not had the same dry powder since the Great Recession. Further, cash has been reduced significantly from $28.6 billion in 2005 down to $4.6 billion in 2014. Chevron, on the other hand, has relatively increased cash on hand since 2009.

Finally, free cash flow in the millions:

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I seek consistency in free cash flow; it not only provides in indication that a company is earning well but also steady free cash flow means sustainable dividend payments.

Chevron has performed poorly in this metric compared to the four other companies. Chevron has been in the red since 2013 and has not been able to recover. This will certainly mess up anyone’s discounted cash flow model when figuring Chevron’s.

Exxon, on the other hand, had been a leader all this time. PetroChina, China Petroleum & Chemical and China National Offshore Oil have not been consistent.

One more thing, dividend yield (as of Jan. 24):

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A quick ocular inspection revealed that China National Offshore Oil should be in any of the dividend investor’s portfolio given its high dividend yield. But after checking some financial numbers, it sure is less appealing at the moment. Exxon carries the lowest yield as of the moment, and it shouldjust maintain it that way until oil prices go higher than $60 per barrel again. Chevron, on the other hand, is in a more difficult position.

Nevertheless, I am not sure how its Q4 earnings announcements will be these coming weeks, but it sure will be interesting to see how it will be.

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Market price.

Disclosure:Â I have shares in Exxon and Chevron but do not plan to initiate purchase within the next 24 hours. I am not a professional financial analyst. This is just a hobby. My work is not error-free, but I strive for it to be. Do not consider this buy or sell advice. Invest at your own risk.

Happy Investing!