Sometimes I compose these Real Money columns in my head the night before I submit them. Last night I decided not to do so, as I was bombarded with idiocy regarding the board of directors vote at ExxonMobil (XOM) and I was afraid I might use inappropriate language.
Now, a day later, calmly, let me note that hedge fund Engine No. 1 -- styled by the media as activists and a holder of a whopping 0.02% of Exxon's shares outstanding -- won election of two of its director candidates for Exxon's board. One other Engine No. 1 nominee lost, and the outcome of the fourth seat was too close to call.
As the media hailed this as some kind of historic victory for climate change proselytizers, the fact remains that Exxon management managed to elect eight of its candidates to a 12-member board, with the outcome of two seats still undecided.
I think that the politics of climate change are appalling and the tactics used by shareholders who actually own meaningful quantities of XOM shares -- unlike Engine No 1 -- like BlackRock (BLK) , for instance, are as stupid as they are ineffective. These are the people whom I avoid like the plague at dinner parties in NYC, and their feckless media collaborators' work is unseen by me. I have much better things to do with my time than explain that the Earth is four and a half billion years old.
Ill-conceived plans like Exxon management's bizarre scheme to bury carbon emissions in the Gulf of Mexico are value-destructive for me as an XOM shareholder. Those who think they are fighting Big Oil for the sake of the planet, while millions of its residents suffer in energy poverty owing to lack of access to hydrocarbon-driven power ... have probably already clicked away form this article. Good riddance.
And if you are expecting the next paragraph to be a passionate defense of XOM CEO Darren Woods and his stewardship of the company, well, no. Chevron (CVX) has managed the pants off Exxon in its response to the pandemic. Also, Exxon's management of its most precious holding -- its AA-rated balance sheet is head-scratching.
Exxon generated $9.3 billion of operating cash flow in the first quarter of 2021 and added an additional $300 million in proceeds from asset sales. This allowed Exxon to pay an unchanged $0.87 quarterly dividend to the tune of $3.7 billion. What a terrific performance, and my call in the fourth quarter of last year that XOM would not cut its dividend remains one of my best.
But, the cash flow statement continues below those lines, and, for some reason, Exxon paid down $4.0 billion of debt in the quarter after using $2.7 billion for capital expenditures. So positive operating cash flow became negative free cash flow. And my head exploded.
Why would you possibly pay down debt in this interest rate environment? Exxon's cash flow outlook has three commodity pricing levels -- $45/$50/$55 per barrel of WTI oil -- and today, more than midway through the second quarter, the WTI price is above $66/barrel. This is a cash flow bonanza for Exxon. As a long-term shareholder, I want that cash flow for me and for my clients. Buy back stock, Darren.
But that's not why Exxon management lost a couple board seats in addition to the one already held by self-styled activist Jeff Ubben. No, that was wokeness. There is no such thing as a woke energy company. There are, however, strategies to reduce carbon, especially the promotion of natural gas, which in pure form only has one carbon atom (CH4), but that is not what these provocateurs want. A stronger management team would have swiped them away like mosquitoes, but when it comes to Exxon, we long-term shareholders have learned to embrace the phrase "it is what it is"
Cash flow never lies. Exxon is going to generate an extraordinary amount of it in the second quarter. XOM will continue to invest that cash in high-return projects in the Permian, Exxon Chemicals, natural gas production in Papua New Guinea and the incredibly promising development in the Stabroek field off Guyana. This will support the dividend, easily, and will continue to reward those that have endured the slings and arrows of holding Exxon. Turn off CNN, shut the New York Times and buy some XOM. Unlike Engine No. 1, XOM shares actually form a meaningful portion of my firm's holdings, and I won't let up on management.