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No. of Recommendations: 1
February 3, 2020 ($60.73) Tilson writes some negative stuff

He claims 10-years of declining revenues. Claims Net Income and operating cash flow declining even faster. “Massive and rising capex”.

Claims operations aren’t generating enough cash to cover capex, much less its dividend of 5.6% or $14.7B.

He feels their earnings release, presentation, and supplement hides this, and is misleading.

“I understand that companies want to put their best foot forward, but this chart is highly misleading in multiple ways...

First, it lumps asset sales – which you must search elsewhere to learn is a massive $3.7 billion – in with cash flow from operations. This is nonsense. Asset sales are one-time events that are completely separate from ongoing operating cash flow. The correct number to use when calculating free cash flow is $29.7 billion.

In addition, while ExxonMobil discloses its actual capex of $31.1 billion, when calculating its free cash flow, it chooses to instead use a much lower $26.8 billion of "PP&E Adds/Investments & Advances" – whatever the heck that means.

The company then subtracts $26.8 billion from $33.4 billion to arrive at a robust $6.6 billion in "Free Cash Flow."

This number is as phony as a three-dollar bill. The simple and universally accepted way to calculate free cash flow is operating cash flow minus capex, which was negative $1.4 billion for ExxonMobil last year.

So how did the company come up with $14.7 billion to pay a fat dividend to shareholders? Partly by selling assets... but mostly by taking on more debt, which rose by $9.1 billion from $37.8 billion to $46.9 billion last year. (Again, you have to look hard for this information – the word "debt" doesn't even appear in the 15-page earnings release.)

In light of ExxonMobil's declining business and unfunded dividend, you have to wonder what investors are thinking in valuing the stock at 18.5 times 2019 earnings of $3.36 per share. Many are probably seduced by the 5.6% dividend – which isn't likely to be cut anytime soon, as this would crush the stock. But that will be thin gruel if the stock continues to decline, as I think it will.

Others may be hoping that the enormous capex will yield huge new resource finds. All I can say is, so far, so bad. And lastly, some might own ExxonMobil based on the expectation that oil and natural gas prices will rise. I have two thoughts on this...

First, if this happens, you'd make a lot more money owning the stock of a smaller company... And second, I think falling energy prices are far more likely as the world quickly pivots to electric vehicles and alternative energy sources like wind and solar in the coming years.

In short, ExxonMobil looks like a classic value trap – a melting ice cube that doesn't come within a country mile of covering its dividend, which it will likely eventually be forced to cut (though not for a few years I suspect)...”


I will wait for 10-K and more analysis. ROE and ROIC is still in a decent position.

Here are some notes of mine on Exxon, which I have yet to update:

October 12, 2019 ($68.98)

2-Minute Drill and Thesis:

Exxon is a diversified energy company which produces not just oil, but also is the largest natural gas producer in the USA. They explore, develop, refine, distribute, drill and are one of the largest petrochemical suppliers in the world. They have successfully done this for over 100 years. They have credit ratings of AA+ from Standard and Poor’s, and Aaa from Moody’s. Keep in mind that natural gas prices continue to be at depression like levels for a decade.

Exxon is the world leader, and we are waiting out the storm which first occurred with natural gas and has been occurring with oil. The earnings ratios are certainly on the elevated side, and the Return on Equity has also been in decline. One of the ratings agencies downgraded Exxon during 2017. Industry and Exxon are going through a grueling downturn. The investment thesis is based on a world leader in upstream (production) and downstream (refining) being able to weather the storm.

Thesis also tied into price of oil and natural gas, commodity exposure, and international growth exposure. We are buying what we consider a safe dividend at historically proper fundamentals. I think it is impossible to project earnings and cash flow. The price of the commodities will constantly change. Yet, we see have a healthy company, which is reinvesting in its core competence. Has a fairly conservative balance sheet.

June 12, 2019 ($74.25)

Yield is 4.69% ($3.48). Earnings expected at $3.90 which would give a P/E of 19.03X. Dividend payout has averaged NMF% for the last 10 years, and 47.6% for 9 of last 10 years. The payout ratio was 94% in F2017, and 66% in F2018. Dividend payout ratio expected to be 88% for F2019 and 75% for F2020. ROE has averaged 15.69% for the last 10 years. ROE was 7.3% in F2017, and 10.9% in F2018. ROE is expected to be 8.5% for F2019, and 10.0% for F2020. ROTC has averaged 14.83% for the last 10 years. ROTC was 6.6% in F2017, and 10.0% in F2018. ROTC is expected to be 8.00% for F2019, and 9.5% for F2020. Average P/E for the last 10 years has been 18.25X. Projected eps for F2020 is $4.75 which equates to a forward P/E of 15.63X. VL gives it ‘A++’ financial strength, and a Safety rating of 1. VL projects a price of $100 -$120, between 2022 – 2024 (5/31/19).

Shares outstanding expected to be 4,237 at December 31, 2019 and 4,237 at December 31, 2020.

Standard and Poor’s credit rating is ‘AA+’ Outlook Negative (5/24/17) This is highest rung of High Grade.

Moody’s credit rating is ‘Aaa’ Outlook Stable (6/7/17) This is Prime Maximum Safety.

Fitch removed their rating in 2012.
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