$XOM reported 3Q earnings - thoughts after today's earnings report & conf call

1) Recap of recent history
2) XOM outlook & commentary
3) Puts & takes from 3Q earnings conf call

#EFT
#OOTT

Recent history recap:

$XOM Cash from Operations compared with Capex & Dividends for the last 20 years.  Simple operating cash in - cash out

In general, XOM operations have roughly been covering capex spend over the last two years. This is pre-dividend

XOM dividend burden has grown over time, though flat-lined in last couple years as XOM has been running into balance sheet issues

The trend of growing dividend and declining cash flow has found $XOM dividend consuming an ever-increasing portion of the company’s cash flow from operations

Cash From Ops - Capex - Dividends.  Since 2019, $XOM operating cash flow has undershot capex + dividends by ~$3B per quarter

XOM has tried to bridge the cash flow shortfall with asset sale proceeds, though this source of cash has slowed in '20

Lately, market only has appetite for cash flowing assets. So, XOM production has shrunk as it’s sold producing assets to cover cash flow deficits

Disposals have certainly helped on the margin, but have lately been grossly insufficient to cover continuing cash flow shortfalls

Thus XOM total debt has grown, particularly in the last two years. Total debt at just under $70B as of the company’s 3Q20 report

Seventy billion dollars of debt

Net debt (debt – cash).

A jaw-dropping statistic: XOM has added $88 billion in net debt since 2008

Leaving it with elevated (and expanding) leverage metrics that look more like 2nd tier US E&P than a global super major

XOM 2021 Outlook:

Cash In = $25B (consensus)
Cash Out (Capex): $17.5B (from mgmt)
Cash Out (Div): $14.8B (unchg)
Net: $(7.3)B

'21 upside potential? Likely not on production

“So, there's a lot of -- there's a wide band of uncertainty, but broadly speaking, we would see production staying around -- about flat year-on-year”

'21 upside potential? Likely not on commodity pricing (as of today)

Consensus estimates based on commodity outlook well above current strip

'21 upside potential? Likely not on downstream earnings

5-3-2 crack strip running well below last decade’s realized margins

XOM lodestar in corporate-speak:

“there will be no change to our capital allocation priorities of investing in industry advantaged projects, maintaining a strong balance sheet and paying a reliable dividend.”

Swiger: "“But I'll tell you, we fully understand the importance of the dividend to our shareholders. It's very important to them and we're very thoughtful on that.”

Swiger: “We do have refinancing needs going forward in the future as term debt matures. But we also want to maintain a level of balance sheet flexibility. We believe that going above the $70 billion level, that second quarter level, is going to impact those objectives.”

3Q20 cash balance of $8.8B gives the company 2-3 quarters before it needs additional cash infusion, absent more asset sales or an unforeseen windfall

Swiger: "“we put the plan together for 21 based on our best assessment of the market. It has some contingency on it... but were we to run out of that contingency, obviously we'd have to look to pull the next lever.”

No one on the call asked what 'next lever' meant

Here’s the crux of XOM mgmt pitch: market is below 10 yr ranges across each business line, therefore it sees more upside than downside from here.

10 yr maybe, but what about 30 yr lookback? What if ‘10-’19 was abnormal? What if pre-’10 and ‘20+ are ‘normal’?

Swiger: "all 3 businesses are simultaneously experiencing prices and margins below the 10 yr range, significantly impacting the corporation’s earnings... this suggests there is much more margin & price upside than downside going forward, and therefore, an increase in earnings.”

What if ‘10-’19 was abnormal? What if pre-’10 and ‘20+ are ‘normal’?

Dated Brent price

What if ‘10-’19 was abnormal? What if pre-’10 and ‘20+ are ‘normal’?

US 5-3-2 crack spread

Swiger: “We see the impact in the broader industry, with mounting losses, reduced investments and increased closures. And while questions remain around future demand recovery, one thing is certain, current conditions cannot continue”
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Why not?