Insiders, which are company executives or any person or entity that owns more than 10% of a company's voting shares, often possess exclusive information regarding the outlook of the companies they work for. This advantage exists because of the first-hand knowledge they gather as a result of being involved in the daily business operations of a company.
There is, however, a way for investors to get a measure of what insiders think about the stock price of a company and its prospects, which is to analyze the trading activities of top-level executives.
As oil and integrated companies continue to get hammered in the market, insiders at Exxon Mobile Corporation (XOM, Financial) have begun accumulating shares. Below is a summary of such purchases completed in the last week.
| Name of the reporting person | Designation | Number of shares purchased | Price | Value |
| Andrew Swiger | Senior vice president and principal financial officer | 30,000 | $33.80 | $1,014,000 |
| Neil Duffin | President of Exxon Mobil Global Projects Co. | 30,000 | $36.40 | $1,092,000 |
Source: Form 4 filings
Over the last decade, insider transactions were dominated by the disposal of shares, not purchases. This brings to light a potential change in the sentiment of company executives, which is likely a result of the significant drop in the share prices this year.
Source: GuruFocus
The uncertainty regarding the near-term outlook for crude oil prices has pushed back many investors on to the sidelines. The dividend yield of over 10% for Exxon at Friday’s closing price of $32.74 has failed to entice income investors as well. On the contrary, insiders have been sleeping on the opportunity to buy shares of one of the largest integrated oil companies in the world at discounted prices.
The uncertainty is here to stay
If there was a way to predict energy market performance in the next couple of years, the decision-making process of investors would have been much simpler. But, the lack of clarity regarding how oil prices will behave is making it difficult to filter out energy companies that are likely to survive the oil price crash and come out stronger than ever.
Covid-19 and the oil price war between Saudi Arabia and Russia continue, meaning that oil prices could remain under pressure for a few months or even a year depending on the level of global economic activities. This uncertainty should be incorporated into the analysis of Exxon Mobil because of the company’s dependence on energy prices.
A dividend cut is on the cards, but this is not entirely bad
Exxon Mobil has a solid track record of distributing dividends to shareholders. Since 1983, the company has hiked dividends per share each year, which is indicative of the commitment by the management to reward shareholders who are in it for the long haul.
The yield is at an all-time high as of the writing of this article. However, investors should not allow this to cloud their judgment. There’s reason to believe that Exxon might be forced to cut the dividend as a result of the energy market turmoil.
As illustrated in the below chart, the company has not been consistent in covering dividends with free cash flow, which is a worrying sign considering the bleak outlook for oil in the near term. The decline in absolute cash generated is adding to the worry.
Source: GuruFocus
Before jumping to a conclusion, however, it’s important to establish my theory on how Exxon hiked dividends in the recent past.
An analysis of the balance sheet position of the company reveals that Exxon has raised debt to not only cover capital investments but also to support dividend payments. This has led to a spike in the long-term debt portion of the company.
Source: GuruFocus
Using borrowed funds and distributing them to shareholders is not sustainable in the long run. The company was likely banking on robust demand for energy commodities and inflated oil prices in the foreseeable future, but the recent macroeconomic and geopolitical events have turned things around dramatically. Amid this chaos, Exxon management might find themselves in a precarious scenario, as using debt would only impair the health of its balance sheet, but a dividend cut might erode investor sentiment and lead to a further decline in the share price.
In 2018 and 2019, Exxon hiked the quarterly dividend by 5 cents at the end of April. If the same decision is made this year, with 4.2 billion shares outstanding, the incremental cash burn would be $800 million per annum. When oil crashed in 2014, Exxon only hiked quarterly dividends by just 2 cents per share. In the most likely scenario, the management will decide to increase dividends by a lower amount and ditch the recent trend.
However, from the perspective of long-term investors, the best decision would be to cut the dividend and free up some cash to improve the balance sheet health of the company. Because of the uncertainty regarding oil prices, it’s difficult to determine when Exxon would be back in its normal state. Therefore, whatever cash the company can save now will be helpful to ride the ride and stay afloat.
Even though investors will most likely punish the company for deciding to cut shareholder distributions temporarily, such bold actions may need to be taken during trying times to ensure survival.
Be bold and focus on the long term
The recent decline in Exxon Mobil share price has erased all the gains reported in the last 10 years, which is troubling news for investors. There’s a real possibility of the company cutting the dividend as well.
However, despite all the negativity, there’s a silver lining. The demand for energy will pick up along with the expected growth of the global economy. An alternative to crude oil does not exist yet, and resources are limited. Therefore, oil price will increase in the long term. The short-term volatility cannot be used to measure of Exxon’s long-term prospects.
In the last decade, the company has carried out billion-dollar investments in a bid to build its oil reserves to benefit from the expected increase in energy prices.
Source: GuruFocus
Exxon operates under four business segments.
- Upstream
- Downstream
- Chemical
- Corporate
In its upstream segment, the company has assets in the Permian Basin, Guyana, Brazil, Papua New Guinea and Mozambique. Exxon has initiated a plan to increase its oil production in the Permian Basin from 250,000 barrels in 2019 to 600,000 in 2021. During an investor presentation last year, company executives confirmed that an above-10% return on investment can be realized from this expansion of capacity if oil trades at an average price of $35.
According to The U.S. Energy Information Administration, a barrel of crude oil will average $43.30 in 2020, $55.36 in 2021 and $100 by 2050. These forecasts were made after considering the impact of the novel coronavirus outbreak and the oil price war between Saudi Arabia and Russia. These target prices paint an optimistic outlook for Exxon as the company has the potential to earn a high return on its Permian Base investments.
Plans are in place to develop the company’s other upstream assets as well. Exxon owns exploration wells across the world, and this massive scale will play to the advantage of the company in the future.
Source: Company presentation
Also, the company has invested in improving the potential of its other business segments as well. The quality of technology used in the business process has been identified as a key differentiator and the management expects to realize millions of dollars in cost savings over the next five years as a result of investments in deploying high-tech solutions at its exploration sites.
The short-term pressure on oil prices clouds the long-term prospects, which might result in investors failing to capitalize on this opportunity. Insiders, however, have already joined the party, likely because they are reading the situation better than the general investing public. In my view, long-term investors may want to follow suit and bet on Exxon to deliver attractive returns in the future, regardless of whether or not the dividend will be cut in April.
Disclosure: I own Exxon Mobil shares.
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