Band Stjepan Kalinic
This article first appeared on Simply Wall St News.
It is now evident that Exxon Mobil Corporation(NYSE: XOM) failed to break the downtrend after posting strong second quarter results.
However, the company shows admirable resilience when it comes to managing cash flow and staying committed to the impressive 6.4% dividend. This article will take a look at the latest developments around the title and the current situation regarding its debt.
In the storm
We are now in hurricane season, disrupting oil production in the Gulf of Mexico. This area, which accounts for 17% of total U.S. crude oil production, is now more than 90% closed as Hurricane Ida makes its way. So far, Exxon Mobil has cut production at the Baton Rouge refinery to 50% of its capacity, while many competitors have closed their doors completely.
Meanwhile, the company is relaunching negotiations with the government of Papua New Guinea over the P’nyang gas fields. The US $ 19 billion natural gas project is expected to take 8 years.
In addition, the company remains invested in new technologies. With the cost of green hydrogen (hydrogen produced by renewable energies) projected to become competitive with fossil fuels by 2040, it is an opportunity for the transformation of Exxon into a more sustainable energy producer. Just a week ago, JPMorgan analyst Elaine Wu made a prediction that fuel cell vehicles could account for a third of commercial trucks in China by 2050.
See our latest review for Exxon Mobil
Exxon Mobil’s debt
As you can see below, Exxon Mobil had $ 60.6 billion in debt in June 2021, up from $ 69.5 billion the year before. On the flip side, it has $ 3.47 billion in cash, resulting in net debt of around $ 57.1 billion.
NYSE: History of XOM Debt to Equity September 1, 2021
How healthy is Exxon Mobil’s balance sheet?
According to the latest published balance sheet, Exxon Mobil had liabilities of US $ 62.2 billion due within 12 months and liabilities of US $ 109.5 billion due beyond 12 months. On the other hand, he had $ 3.47 billion in cash and $ 28.5 billion in receivables due within one year.
As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 139.7 billion. Even with a market cap of US $ 230.8 billion, this is still a considerable sum.
EBITDA review
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage).
Thus, we consider debt versus earnings with and without amortization charges.
Exxon Mobil has net debt worth 2.3 times EBITDA, which isn’t too much, but its interest coverage looks a bit weak, with EBIT at just 5.7 times interest expense.
This is in large part due to the company’s large depreciation and amortization charges, which arguably means that its EBITDA is a very generous measure of profit, and its debt may be heavier than it appears. At first glance. It should be noted that Exxon Mobil’s EBIT has increased by 85% over the past twelve months.
While the balance sheet is clearly the area to focus on when analyzing debt, it is ultimately the future profitability of the company which will decide whether Exxon Mobil can strengthen its balance sheet over time.
You can check more in this free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to pay off debts, so we always check how much of this EBIT is converted into free cash flow. Exxon Mobil has generated free cash flow over the past three years, amounting to a very solid 88% of its EBIT, more than we expected. This positions it well to repay debt if it is desirable.
Reduce debt while keeping money
Fortunately, Exxon Mobil’s impressive conversion of EBIT to free cash flow means that it has the upper hand over its debt. So far, the company has managed to reduce its debt by around US $ 7 billion since the start of the year while maintaining constant cash flow AND still paying a high dividend.
Considering all of this data, it seems to us that Exxon Mobil is taking a reasonable approach to debt. This means they take a bit more risk in the hope of increasing shareholder returns. However, as long as oil prices stay around these levels, this strong cash flow is set to continue.
The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 1 warning sign we spotted with Exxon Mobil.
Sometimes it’s easier to focus on businesses that don’t even need to go into debt in the end. Readers can access a list of growth stocks with zero net debt 100% free at present.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St do not have positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.
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