Exxon Improves Cash Flow and Reduces Debt

Exxon XOM turned in a strong second quarter buoyed by a recovery in commodity prices and a record quarter from its chemical segment. Downstream improved but continued to be a drag due in part to planned maintenance and weak market conditions. Adjusted earnings improved to $4.7 billion from a loss of $3.0 billion last year. Meanwhile, operating cash flow surged to $10.3 billion from $1.5 billion the year before as debt fell another $2.7 billion during the quarter bringing the total reduction to $7 billion since year-end 2020. As a result, net debt to capital fell to 26.5% from 28.7% at the end of 2020. Our fair value estimate and narrow moat rating are unchanged.

Unlike peers, Exxon has yet to introduce repurchases, while the dividend has remained flat for two years. However, fundamental improvement is ongoing while higher commodity prices should assist in deleveraging. Exxon delivered over $1 billion in structural efficiencies improvements during the first half of the year and remains on track to deliver its $6 billion target by 2023. We expect Exxon to maintain focus on capital discipline given recent activist pressure, new board members, and past relative underperformance. Management reiterated that capital spending will come in at the low end of its $16 billion-$19 billion guided range. As such, shareholder returns should follow once debt falls into management’s preferred range of 20%-25%. Given valuation and potential for improvement, we think Exxon remains an attractive option in the sector.

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