Growth underpins Exxon’s income case

Since it was spun out of Standard Oil in 1911, the corporation we now know as ExxonMobil (US:XOM) has never failed to pay an annual dividend. Distributions have increased each year since 1982, and have grown by more than 5 per cent per year since 2014, eclipsing its supermajor rivals.

It’s an enviable track record, and the long-term forecasts are equally strong. Over the next seven years, analysts at HSBC expect cash dividends to increase by an average 3.1 per cent a year, and for management to buy back stock equivalent to 19 per cent of Exxon’s current market capitalisation.

As such, there are many global investors who view the world’s largest listed integrated oil and gas company as a shoe-in on the long-term dividend list. But there are growing reasons to believe that the coming decade is unlikely to match up to the historical track record, and to raise questions of the aggressive growth strategy that underpins Exxon’s income case.

You wouldn’t know this from the company itself, which is rather more bullish than its defensive reputation suggests. That bullishness finds its focus in upstream projects. Powered by major investments in oil production from the Permian basin and Guyana, Exxon expects to increase its volumes by an enormous 2.5m barrels of oil equivalent per day (mboepd), more than doubly offsetting field declines relative to 2018’s output of 3.8mboepd.

For context, this is double the growth HSBC expects from Shell over the same period, and is far ahead of Exxon’s already-smaller peers. The price of this growth is a higher capital expenditure bill and free cash flow breakeven level than the rest of the supermajors.

Apparently, Exxon is comfortable with this. Assuming the oil price averages $60 a barrel, management reckons the group can generate $190bn in free cash flow between 2019 and 2025, of which $100bn has been earmarked for dividends at the 2018 gross payout level of $3.23 a share. Investors have been told the remainder will be directed to dividend increases, share buybacks, debt reduction and new projects, although with comparatively low (and cheap) borrowings, and more than enough growth on its plate, shareholder returns are likely to be the focus.