It is fitting that Exxon Mobil’s fourth quarter dividend was paid Tuesday, the same day the company prevailed over the State of New York in court. I have mentioned in prior Forbes columns that it is often embarrassing to be a New Yorker, but nothing has been more cringeworthy than the state government’s four-year pursuit of fraud charges against Exxon. This investigation, launched in 2015 by disgraced former Attorney General Eric Schneiderman and continued by current New York AG Letitia James, was attempting to prove an incredibly flimsy premise—that Exxon management perpetrated fraud in its disclosures on potential risks for potential impacts from potential pricing of carbon to offset potential increase in global temperatures—under New York’s incredibly broad Martin Act.
BRAZIL - 2019/05/24: In this photo illustration the Exxon Mobil Corporation logo is seen displayed ... [+]
Even against those low standards, Judge Barry Ostrager threw out two of New York’s four charges against Exxon in November and on Tuesday ruled in favor of Exxon on the other two. The matter is not yet completely closed, as Massachusetts has a similar action underway, but it would seem that the folks at Exxon can now get back to work.
This case exposed the incredibly stark and puzzlingly elementary misunderstanding of corporate behavior by the modern American left-wing. The most ridiculous part of New York’s suit was the headline-grabbing amount of damages that the State had presumed were inflicted on Exxon shareholders by its management. $1.6 billion. Wow!
While that figure may have played well in left-leaning publications such as the New York Times and Washington Post, it actually represents about 0.6% of Exxon’s current market capitalization. It also pales in comparison to the $13.8 billion in dividends that Exxon paid to its shareholders in 2018. Exxon has paid dividends continuously since 1911 and created more value and more jobs than any Northeastern liberal prosecutor could ever destroy.
So, as a long-time Exxon shareholder, it’s nice to have the negative newsflow of the New York trial out of the way, but everything has been far from rosy for Exxon’s stock. XOM shares have fallen about 10% in the past year in a market that has risen nearly 19% in that time period. As a frequent investor in and commentator on the energy sector, I am quite aware of the market’s lingering distaste for energy shares since the oil bust of 2014. I get it.
Chevron shares have actually posted a 2.5% gain in the past 12 months, though, and have strongly outperformed (+6.45% versus -1.21%) Exxon shares in 2019 proper. Also, the specter of newly-public behemoth Saudi Aramco looms large over the energy sector. Aramco shares started trading this morning on Riyadh’s Tadawul stock exchange. Based on the record-high $29.4 billion value of Aramco’s IPO, that company is worth $1.7 trillion, more than five times the value of Exxon Mobil.
As a long-time Exxon shareholder, having to pay attention to legal actions like New York’s are a minor nuisance. The fact that Exxon refuses to do even more than a token share buyback—the company repurchased $414 million worth of stock in the first nine months of 2019—is a major annoyance, however, and, in fact, drives me absolutely bananas.
So, while it is easy to laugh at the Left’s attempts to portray Exxon’s management team as some sort of star chamber via ridiculous—and, as of Tuesday, fully debunked—conspiracy theories, I sometimes wonder what the folks in Irving are doing, myself. They seem to be fixated on Exxon’s legendary AAA credit rating without realizing that a) S&P removed that in 2016—it is now AA+—and b) almost no one has followed S&P’s credit research since they missed the cause of the Great Financial Crisis in 2008.
Exxon Mobil is massively overcapitalized. Yes, over-. Exxon generated $50 billion of EBITDA in 2018. I believe the company could easily carry three “turns” worth of leverage in the form of net debt. That’s not cowboy economics of 4x-5x leverage, it’s just the realization that Exxon’s cash flows could justify a $150 billion net debt load. At the end of the third quarter of 2019, Exxon’s net debt was $20.5 billion. So, Exxon’s balance sheet underutilization is an astounding 12-digit dollar amount, and some of the proceeds from leverage could have been used for a robust share repurchase program.
Exxon management clearly doesn’t get it. To be fair, it took Tim Cook a year or so as new CEO of Apple to finally embrace share repurchases, but the fact that AAPL shares traded Tuesday at an all-time high level of $270 is a credit to his belated embrace of financial engineering. It works!
So, I will give Exxon’s Darren Woods the benefit of the doubt and concede that he and his predecessor, the legendary Rex Tillerson, were somehow too distracted by New York’s lawsuit to focus on maximizing shareholder value. That excuse is now gone. I love receiving Exxon’s dividend, and I reinvest it every quarter in more Exxon shares, but I am getting very tired of “buying low.”
https://www.forbes.com/sites/jimcollins/2019/12/11/as-exxon-mobil-celebrates-its-court-victory-over-new-york-state-it-is-time-for-the-company-to-reward-shareholders/
2019-12-11 11:00:02Z
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