One of the most consistent dividend payers in the history of the energy trade could be in danger of having to slash its payout, according to the options market.
The energy space as a whole has suffered greatly at the hands of the global coronavirus pandemic. Demand for oil has fallen off a cliff, sending prices tumbling, and briefly forcing them into negative territory. The XLE Energy ETF has dropped correspondingly to the tune of more than 40% this year. Exxon Mobil has slightly underperformed during the same period, and traders are betting that the company is starting to feel the squeeze in a way that will be reflected in more than just the stock price.
“Right now, the options market is forecasting an implied dividend range of somewhere between about 30 and 50 cents over the next dividend period, declining to somewhere between 20 and 30 cents this time next year. That would be a significant cut from the 87 cents [Exxon is] currently paying,” Michael Khouw, chief investment officer at Optimize Advisors, said Tuesday on CNBC’s “Fast Money.”
That implication doesn’t necessarily mean that a dividend cut is set in stone, nor does it mean that any cut would be tied specifically to the implied range. Instead, the implied dividend can best be thought of as a more broadly defined expression of where traders believe the dividend is heading.
“There could be some probability that they cut it entirely, or a higher possibility that it just gets cut materially, but when the dividend exceeds your free cash flow, something’s got to give,” said Khouw.
Exxon Senior Vice President Neil Chapman said on the company’s late-July earnings call that the energy giant is planning to reduce operating costs further and defer expenses where it can, and by doing so that “will enable us to maintain the dividend and hold debt at its current level.”
Shares of Exxon Mobil were slightly higher Wednesday afternoon.