Oil Boom

U.S. oil prices hit another multiyear high today, closing up 1.7%, at $72.12 a barrel. It's a rise of more than 100% since October 2020, and the highest level since 2018. Global demand for oil remains below pre-pandemic levels, but supply is down even more. That's a recipe for higher prices for a commodity.

That rise in the oil price has entirely changed the fortunes of Exxon Mobil. The U.S.' largest vertically integrated oil major has been in the news lately mostly regarding its proxy battle with an environmentally minded activist investor, which succeeded at winning seats on the company's board. 

Exxon had a tough run in 2020, as the pandemic-era collapse in demand for oil caused prices to plummet. Exxon burned money last year, and investors and analysts debated whether the company would have to cut its dividend—after raising it for 37 years straight. For better or worse, Exxon's leaders decided to maintain their quarterly payout and pace of capital expenditures despite the company's drop in revenues, and instead load up on debt to fund the largess.

"The dividend cost the company $14.9 billion, a hefty sum in a year when it made just $14.7 billion in operating cash and spent $21.4 billion on capital and exploration expenses," Barron's Avi Salzman wrote today. "Exxon borrowed substantially, ending the year with $20.1 billion more net debt than it had in 2019."

Now, with vaccines and reopening economies pushing oil prices to multi-year highs and a much stronger outlook for demand, Exxon’s cash flows are on the rise again. In the first quarter, the company was able to pay for its dividend and capex out of cash flows.

At the rate things are going now, a resumption of annual dividend increases could be on the table again by the end of this year. The stock’s current dividend yield is already 5.5%—generous relative to the market average and meager bond yields. 

But long-term dividend growth at Exxon Mobil will critically depend on the path of crude oil prices. And that's a tough one to forecast, with geopolitics to consider, renewable energy sources increasingly in favor, and governments around the world pushing policies to make fossil fuels more difficult to extract.

Read the rest of Avi's report here.