Higher oil prices will increase Exxon's massive cash flow and support future dividend increases
Exxon Mobil (NYSE:XOM) stock hasn’t exactly been a
barn-burner this year, up only 7%. Much of its recent gains came from the
recent spike in oil prices due to the Saudi oil field attacks.
This conflict is good for XOM stock. Most of its earnings
come from its upstream operations — selling oil and gas it discovers in the
U.S. and abroad. For example, $3.26 billion of Exxon’s $3.13 billion in total
earnings this past quarter came from upstream earnings. Its downstream and
chemical earnings just covered up corporate level losses.
In effect, higher oil and gas prices will lead to higher
Exxon Mobil cash flow. XOM stock will do well if the prices of oil and gas
remain high over the next year.
For example, the West Texas Intermediate spot price is still
down almost 15% in the past year. This is after the 15% spike on Sept. 16 and
subsequent 5% fall the next day. So, in effect, Exxon stock will do well if the
tension stays high in the Middle East.
But even if this scenario does not last, Exxon Mobil will
continue to produce massive amounts of cash flow. In the first half of 2019,
Exxon produced $14.4 billion of what it calls “Cash Flow from Operations and
Asset Sales.”
This is more than enough to cover the dividends XOM stock
pays. Exxon’s dividends cost only $7.2 billion in the first half. This is 50%
of the Cash Flow from Operations and Asset Sales.
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