Stock Analysis

Exxon Mobil's (NYSE:XOM) Debt is Going in the Right Direction

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NYSE:XOM
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It is now evident that Exxon Mobil Corporation(NYSE: XOM) failed to break the downtrend after posting solid Q2 results.

However, the company is showing admirable resilience when it comes to managing the cash flow and staying committed to the impressive 6.4% dividend. This article will examine the latest developments around the stock and the current situation regarding its debt.

Into the Storm

We are now in the hurricane season, which spells trouble for the Gulf of Mexico oil production. This area, which accounts for 17% of total U.S crude oil production, is now shut down by over 90% as Hurricane Ida makes its way through. So far, Exxon Mobil has cut the production at the Baton Rouge refinery to 50% of its capacity, while many competitors have shut down completely.

Meanwhile, the company is restarting negotiations with the government of Papua New Guinea over P'nyang Gas fields. The US$19b natural gas project is expected to take 8 years.

Furthermore, the company remains invested in new technologies. With the cost of green hydrogen (hydrogen produced by renewable energy) projected to become competitive with fossil fuels by 2040, this is an opportunity for Exxon's transformation into a more sustainable energy producer. Just a week ago, JPMorgan's analyst Elaine Wu made a prediction that fuel cell vehicles could account for one-third of commercial trucks in China by 2050.

See our latest analysis for Exxon Mobil

Examining the Debt of Exxon Mobil

As you can see below, Exxon Mobil had US$60.6b of debt in June 2021, down from US$69.5b a year prior. On the flip side, it has US$3.47b in cash leading to net debt of about US$57.1b.

debt-equity-history-analysis
NYSE: XOM Debt to Equity History September 1st, 2021

How Healthy Is Exxon Mobil's Balance Sheet?

According to the last reported balance sheet, Exxon Mobil had liabilities of US$62.2b due within 12 months and liabilities of US$109.5b due beyond 12 months. On the other hand, it had cash of US$3.47b and US$28.5b worth of receivables due within a year.

So its liabilities outweigh the sum of its cash and (near-term) receivables by US$139.7b. Even with the market capitalization of US$230.8b, that is still a considerable sum.

Examining the EBITDA

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover).

Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Exxon Mobil has net debt worth 2.3 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.7 times the interest expense.

In large part, that's due to the company's significant depreciation and amortization charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It is well worth noting that Exxon Mobil's EBIT gained 85% in the last twelve months.

While the balance sheet is clearly the area to focus on when you are analyzing debt, it is ultimately the business's future profitability that will decide if Exxon Mobil can strengthen its balance sheet over time.

You can check more in this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt, so we always check how much of that EBIT is translated into free cash flow. Exxon Mobil generated free cash flow during the last three years, amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Reducing Debt while Keeping Cash

Happily, Exxon Mobil's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. So far, the company has managed to reduce its debt by about US$7b year-to-date while keeping the cash constant AND still paying out a high dividend.

Considering all this data, it seems to us that Exxon Mobil takes a reasonable approach to debt. That means they are taking on a bit more risk in the hope of boosting shareholder returns. However, as long as the oil prices keep around these levels, this solid cash flow stream is poised to continue.

The balance sheet is clearly the area to focus on when you are analyzing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Exxon Mobil.

Sometimes, it's easier to focus on companies that don't even need debt when all is said and done. Readers can access a list of growth stocks with zero net debt 100% free right now.

Valuation is complex, but we're helping make it simple.

Find out whether Exxon Mobil is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Stjepan Kalinic

Stjepan Kalinic

Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.

About NYSE:XOM

Exxon Mobil

Exxon Mobil Corporation explores for and produces crude oil and natural gas in the United States and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth0
Past Performance3
Financial Health4
Dividends5

Read more about these checks in the individual report sections or in our analysis model.

Established dividend payer with adequate balance sheet.