Are Starhub and Exxon Mobil Similar? $XOM
A Channel News Asia forum member talk about Starhub being in a similar situation as Exxon Mobil, which hedge fund manager Jim Chano’s have a big short position on.
The premise of Jim Chano’s rational of shorting Exxon Mobil is that although it is the most well regarded dividend aristocrat, it is in fact paying out more than its cashflow:
So we checked in with a large investor with knowledge of the fund’s holdings who told us that it’s American integrated oil giant Exxon that Chanos has a big short position on.
Chanos, founder of Kynikos Associates told Bloomberg TV today, “”Our decision [to short oil major] predates [the Horizon Deepwater rig], and it has to do with financing. If you look at some of the biggest oil companies in the world — and I’ll let you use your own imagination as to which ones those are, there’s a small handful. If you look at their cash flow statements relative to the income statements, you will see companies that haven’t replaced reserves in years and haven’t seen any increase in revenues in years and yet their capital spending eats up all of their cash flow, meaning they are borrowing their dividend.”
Chanos, who built his career on data mining company balance sheets to find who’s not as healthy as they lead the market to think, is believed to have gotten into his Exxon short over a year and half ago. As Business Week and a few sharp blogs noticed in February 09 Exxon is a ‘religion stock’. Meaning investors own it because it’s done well before and some on the street assume its management knows what it’s doing – so why deep dive into their cash flow statements and worry about if they can replace all the barrels of oil they sell to keep the cash flow model going?
But Chanos points out in his Bloomberg interview, “They [We now know its Exxon] are in effect liquidating. And investors don’t realize that. It’s one of the reasons why – and the market does [realize it] to some extent – that’s why the yields are so high. But they’re not earning, in economic terms, in many cases, those yields. And if people did a careful analysis of the cash flows of some of the biggest, most well regarded, integrated oil majors, I think they would be surprised at what they’d find.”
Lets take a look at some figures. My figures are from Bloomberg Businessweek.
Exxon Mobil’s Net Profit is as follows:
2007 – 40 billion
2008 – 45 billion
2009 – 19 billion
It looks like for 2009 there was a major fall in net profit.
Exxon Mobil’s Net operating Cashflow in the Cashflow statement is as follows:
2007 – 52 billion
2008 - 59 billion
2009 – 28 billion
Exxon Mobil’s Capex:
2007 - 15 billion
2008 – 19 billion
2009 – 22 billion
Exxon Mobil’s Free Cashflow:
2007 – 37 billion
2008 – 40 billion
2009 – 6 billion
Exxon Mobil’s Dividend payment:
2007 – 7.6 billion
2008 – 8 billion
2009 – 8 billion
So for 2007 – 2008 they have generated a lot of free cashflow, yet they are consistently paying out about 8 billion. Where did all the cash go to?
Turns out Exxon Mobil have been repurchasing their stocks
2007 – 31 billion
2008 – 35 billion
2009 – 19 billion
To me it looks like Exxon Mobile have been operating within safe limits. But the problem is that free cashflow have fallen drastically off the cliff. 40 bil to 6 bil.
Factoring share repurchases, they are not adding cash to the equity.
Now lets take a look at Starhub’s figures [Data from here >>]
Starhub’s 2009 Net Income: 319 mil
Starhub’s 2009 Net Operating Cashflow: 692 mil
Starhub’s 2009 Depreciation: 245 mil
Starhub’s 2009 Capex: 231 mil
Starhub’s 2009 Free Cashflow: 461 mil
Starhub’s 2009 Div Paid: 316 mil
One would have said that Starhub is paying out more div then its net income. And it will get worse this year since net income is forecasted to be lower and div going to pay out is about 340 mil.
So are starhub borrowing to fund its dividends? I think not. But they are flirting very close to that level.
If you add the depreciation to net income you would reach roughly close to that net operating cashflow of 692 mil.
Starhub is able to payout more than its net income because essentially, depreciation is an accounting expense to take into consideration that assets cannot be useful forever and have a limited functional lifetime.
So in actual fact no real expense is actually paid out and Starhub is free to use that cashflow to pay out dividend or repurchase stocks.
However, paying it out and not replacing those existing assets are probably what Jim Chanos talks about. In the case of Starhub, capex have been 231 mil which more or less matches that of depreciation.
So when do I think that Starhub is in a stage where it becomes unsafe?
- When Free Cashflow is less than the dividend paid out. It more or less means that income is falling, or capex is increasing to an unsustainable level or that they are paying out excessive dividends
- Dividend paid is more or less close to the operating cashflow, more or less means depreciation is not being replaced by capex.
So is Jim Chano’s right to short Exxon? I think the key question is to take a look at why net income have fallen and study in detail what constitutes as capex to Exxon Mobil.
Just like in the case of Starhub, capex in both cases are different proposition. Starhub’s capex is in licenses to operate 3G, LTE, networking equipment, switches routers and fibre optics replacements.
For Exxon’s case its oil reserves. That’s where there is a huge difference. Unlike Starhub’s capex you cannot replace oil reserves readily.
Related posts:
- Starhub Q2 2010 Results:Declining Earning Escalating Costs
- A closer look at Starhub
- Warren Buffett reduces Energy and up defensive stocks
- Starhub holds steady for third quarter 2010
- Starhub Q1 2010 Results:Competition is getting very very intense
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Comments
hi ytrue, good perspective there. i think Chanos is coming from the point of view that reserves , or in a FA sense capital assets are not being replaced. if that is the case, the cashflow is paidout of oil or assets.
but what i think is key to your argument is that if they are generating so much excess cash, what do they do with it? start another line of business? the key is that this is where their expertise lies in.
The Chanos argument does not make any sense. The story is very laughable to imply that XOM is borrowing funds to pay dividends to shareholders. Companies use debt financing for various reasons. Some it maintain their debt to equity ratios while some use to finance projects that may return more than the cost of the debt itself. For example, a company may use debt to finance a project if the interest is 5% and it can expect a 10% rate of return on the project. This has nothing to do with the payment of dividends.
Also, XOM has had problem for years in finding ways to invest excesses cash. They may decided that a stock repurchase program would serve to best increase shareholder value.
In 2009, oil prices basically collapsed along with revenue and the rest of the markets while expenditures stayed about the same. This is a lead/lag relation between contracts and a decline in company’s oil revenues. It takes a while for companies to unwinding contract and labor cost, so cash flow may get hit in the short-term.
There are other factors that may have an impact on revenues too. Conservation, alternative fuels, change in consumer demand or OPEC supply are all factors that could change oil revenues of XOM.
The XTO all stock merger may have provided XOM with a way to increase reserves and get a better return from treasury stocks since markets are returning to normal. XTO has a proven track record with proven natural gas and oil reserves, so the investment risk was less when compared to other proposals to invest in new unproven projects.