Exxon’s focus on debt reduction disappoints shareholders looking for buybacks

By Kevin crowley on 8/1/2021

HOUSTON (Bloomberg) – Exxon Mobil’s second quarter results did little to attract investors as much of the extra cash from soaring energy and petrochemicals prices will be used to pay down debt rather than rewarding shareholders.

Oil giant and rival Chevron Corp. made their biggest profits since the days before the pandemic, fueled in large part by the exceptional performance of their chemical units. But the legacy of the nearly 40% rise in net debt in 2020 was all too clear to Exxon, with CEO Darren Woods prioritizing balance sheet repairs over share buybacks. Exxon stock fell more than 2% on Friday.

Chevron has joined European rivals Royal Dutch Shell Plc, TotalEnergies SE and Eni SpA in restarting buyouts, seen as an important mechanism to return high commodity prices directly to investors. Exxon’s Woods said “explicit returns” from investors would be built into strategic planning after losing a proxy battle that saw a quarter of directors replaced earlier this year. He was neutral when asked if this meant additional returns for shareholders.

“I wouldn’t see huge changes in strategy, but you could see acceleration, more emphasis in some areas,” Woods said on a conference call with analysts Friday. “Restoring the strength of our balance sheet, reducing debt to levels compatible with a strong double A rating” is key.

Chemical reaction

In contrast, Chevron announced that share buybacks will be relaunched during the current quarter to a value of between $ 2 billion and $ 3 billion per year. That’s about half of the amount he spent on the program before his suspension in early 2020.

“Having said that, we are confident in the future,” CFO Pierre Breber said in an interview. The level of redemptions was chosen because “it is really a range that also allows us to continue to repay the debt”.

Share buybacks are being revived or increased at all levels as sectors as diverse as steelmakers, retailers and manufacturers are at the heart of economic expansion. In particular, Big Oil executives seek to reward shareholders as commodity prices rise, a turnaround from previous booms when excess cash was invested in expensive growth projects.

Faced with enormous climatic challenges, the industry is trying to attract investors by offering solid returns at a time when the dividend yield of the S&P 500 Index is at its lowest in nearly two decades.

Exxon’s lack of buybacks eclipsed the $ 4.69 billion in earnings reported for the second quarter, the best period since late 2019, as its chemicals division posted a record performance. Chevron’s second-quarter net income of $ 3.1 billion was its best result since the start of 2020.

The companies’ combined operating cash flow approached $ 17 billion, signaling a global recovery from the dark days of 2020 which saw the U.S. oil titans suffer massive financial losses.

Recovery mode

Exxon repaid $ 2.7 billion in debt during the period, but net borrowing still stands at around $ 57 billion, almost 20% higher than in the first quarter of 2020. At the current rate of Free cash flow, Bloomberg Intelligence analysts Fernando Valle and Brett Gibbs, say so. It would take another year for the company to reduce debt to pre-pandemic levels.

“There is no doubt that rising oil prices and chemical margins have brought some relief to ExxonMobil from where it was six months ago, but the road back remains narrow,” wrote the Citigroup analyst Alastair Syme in a note. “Equity has been a priority in 2020 – the balance sheet has paid for the dividend – and now to repair this damage” capital spending must remain low.

On Friday, the company said annual spending would be at the low end of the previously announced range of $ 16 billion to $ 19 billion.

Exxon posted adjusted earnings of $ 1.10 per share, beating the 97 cents average estimated by analysts in a Bloomberg survey. As for Chevron, it earned $ 1.71 per share, on an adjusted basis, in the second quarter, beating the average estimate of $ 1.60.

Chevron’s buyout program comes on top of an increase in dividends earlier this year, becoming the only Western oil supermajor to lift the payout above pre-pandemic levels. The company also cut by about $ 1 billion from its previous estimate of its capital spending for the full year by $ 14 billion.

Even with the recent increases, both Shell and BP Plc dividends still lag behind pre-Covid-19 payments. Exxon held its dividend stable earlier this week. The key to Chevron’s strength is that it entered the pandemic in a stronger financial position than its rivals, with low debt.

Loan battle

The buyback also signals a bullish outlook. CFO Breber said buybacks would be sustained even during times of falling oil prices. “I was clear when announcing last quarter’s results that we would start a buyback when we were confident we could maintain it throughout the cycle,” he said. “We would like to maintain it for several years.