Why debt is a bigger problem for ExxonMobil than it looks

ExxonMobil (NYSE: XOM) was one of the most profitable companies in the world. At one point, he was an investor’s best friend, producing consistent positive growth. In the past years, this has been anything but. Over the past five years, the stock has fallen by around 32% and down 15% in the past year. Its stock is currently trading around $ 67.50.

Too often, investors look at a company’s balance sheet, find that its long-term debt is only a fraction of its total assets, and deduce that it is financially sound. Chances are they are right, but it can’t hurt investors to better understand their debt structure to be sure.

How much debt is ExxonMobil?

ExxonMobil issued $ 7 billion in floating and fixed rate bonds on August 14. The company plans to use the net proceeds of $ 6.975 billion to refinance some of its existing commercial paper, which bears an average interest rate of 2.37%. ExxonMobil will also use some of these funds for other general purposes, including working capital, acquisitions, capital expenditures and various other business opportunities. This is not a bad position and many companies would like to borrow $ 1.5 billion at 3.095%, repayable over 30 years. But investors shouldn’t be so excited about owning ExxonMobil’s 2049 notes, which earn just over 3% for three decades. It’s a great deal for ExxonMobil, however.

A car that fills up at the pump

Image source: Getty Images

According to Moody’s First Vice President Pete Speer:

ExxonMobil’s negative free cash flow and rising debt levels in the first half of this year are putting pressure on its credit profile, especially with oil prices averaging mid-range levels. cycle during the period. Although this note offering refinances some of the company’s longer-term debt, the company retains great flexibility to reduce debt through asset sales and strengthen its credit metrics.

In its prospectus for the notes, the company says its long-term debt, currently $ 19 billion at the end of June, represents 8.7% of ExxonMobil’s total market capitalization. Add the $ 7 billion of tickets and it grows to 11.6% of its total market cap. This is still a small amount for ExxonMobil. By all accounts, ExxonMobil’s debt is perfectly manageable and could be overlooked by investors in the future.

However, what if the company decides to make a multi-billion dollar acquisition? As Moody’s suggested, the company’s free cash flow was negative for the first six months of 2019. A large acquisition would certainly add to that shortfall. ExxonMobil free cash flow for the first six months appears to be positive at $ 2.9 billion (net cash generated from operating activities of $ 14.3 billion less capital expenditure of $ 11. $ 1 billion). However, Moody’s probably factored in some oil-related adjustments to arrive at a negative number.

According to S&P Global Market Intelligence, its competitor Chevron (NYSE: CVX) has free cash flow in the last year of $ 18.5 billion, 25% more than its GAAP profit for the same period. Meanwhile, ExxonMobil made $ 11.3 billion, 36% below its GAAP profit. Furthermore, Barclays said that ExxonMobil’s free cash flow situation is set to worsen as it increases its capital investment as oil prices appear to fall further. In April, the price of oil was around $ 66 at its peak, today it hovers around $ 53. So while ExxonMobil has managed to free up debt on a fixed rate basis between 1.9% and 3.1%, if its free cash flow decreases, it will have less cash available to repay its debt over time. .

For the past decade, owning ExxonMobil stock has been like owning a used jet ski, it will only get worse. It is unlikely to improve anytime soon, as more industries and businesses move away from dependence on oil, while ExxonMobil doubles. Its 4.74% dividend yield is nice, but it’s not enough to shake the boat, except under circumstances. That being said, ExxonMobil’s debt should not be taken lightly.

What does this mean for investors?

For ExxonMobil investors, this suggests that it makes sense to stay put for now. The company is strong enough and has a long enough track record to be able to bounce back from its current problems. That being said, ExxonMobil is not a buy at this time for fresh money. Investors should keep it on their watch lists, but right now it’s not worth getting it back. Until oil prices start to recover again, ExxonMobil will most likely continue to decline for now.

An energy company that might be worth considering instead is Vestas wind systems (OTC: VWDRY). The Denmark-based wind turbine company is one of the world’s largest wind turbine manufacturers and service providers. The emphasis is increasingly on Renewable energy sources, Vestas Wind Systems is an industry leader moving in the right direction.

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This article was originally published on Fool.com

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