Dec 01, 2020 (Baystreet.ca via COMTEX) -- The energy sector has emerged as the best performer over the past few weeks, with WTI crude prices climbing to their highest level in nearly eight months thanks to a flurry of potential Covid-19 vaccines. Optimism has returned to the oil markets in a big way. Even conservative BP Plc /zigman2/quotes/207305210/composite BP +4.42% has backtracked on its earlier projections that we might have passed peak oil, with the company now saying oil demand might not peak till around 2030.
Yet, Big Oil is still far from being out of the woods, with big dividend payers, in particular, remaining in a precarious position.
With WTI trading at ~$45, Raymond James analyst Pavel Molchanov says ExxonMobil /zigman2/quotes/204455864/composite XOM +3.00% is still not bringing in enough cash to fund its dividend and faces an "unenviable choice" of either selling assets or taking on more leverage to support the dividend.
Last month, Exxon announced that it will keep its dividend at 87 cents per quarter, giving the company a stunningly high payout of 11%.
However, that yield has now fallen to 8.7% after XOM stock climbed 23% over the past month.
Exxon is faced with big decisions on dividend tradeoffs.
The company is still bleeding cash at current oil prices, needing WTI crude price at ~$50/bb to be able to manage its generous payout and also continue with maintenance-level capital spending from operating cash flow.
Exxon needs ~$8B in debt financing to maintain the current dividend level in 2021. However, Molchanov says that divesting assets at potentially suboptimal valuations is the most probable near-term solution but not sustainable.
During its latest earnings call, Exxon revealed that it's in advanced talks on several potential divestments. Earlier, the company said it had lined up $15B in potential divestments and is also assessing the sale of North American dry gas assets for a combined carrying value of up to $30B. If successful, the divestments would rank as some of the largest impairments ever in the oil industry.
Luckily for Exxon, the company can still borrow at attractive rates. However, it reiterated during the earnings call that it does not plan to raise more debt.
Raymond James analyst Pavel Molchanov told clients in a Friday note, as reported by MarketWatch, that Exxon has three ways to avoid its first dividend interruption in decades in what he called an "unenviable choice".