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Exxon's dividend commitment comes at a significant long-term cost

Exxon Mobil (NYSE: XOM) has "a protracted historical past of delivering a dependable and rising dividend … we take this very critically," Vice President Neil Chapman mentioned on yesterday's earnings convention name, including that the corporate anticipated additional cut back working bills and defer spending if doable, which can "enable us to take care of the dividend and preserve the debt at its present degree."

Dividend dedication comes at a major value: Exxon already slashed its capital spending plan by a couple of third to $ 23 billion earlier this yr, and Chapman reported that spending for the following yr would doubtless lower to $ 19 billion.


The draw back outlook could appease short-term traders – the inventory closed yesterday with a modest acquire regardless of a big loss within the second quarter – however with much less cash spent on new initiatives, questions stay on how a lot the corporate might need to sacrifice. long-term investments so very important to success in a cyclical enterprise.

Exxon's money move for the yr covers 70% of its fastened asset program and no dividends, which is supported by the steadiness sheet, explains RBC analyst Pavel Molchanov.

"As such, it’s inconceivable to keep away from a dramatic improve in leverage," writes Molchanov, predicting that Exxon's web debt as a proportion of fairness will rise from 19% to the year-end 2019 at 27% at year-end 2020 – the best leverage ratio. since Exxon merged with Mobil in 1999.

"Whereas we view the dividend as safe – if for no purpose apart from administration's need to take care of S & P's aristocratic standing – the money outflows are colossal beneath present situations" , says Molchanov.

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