There has been much prognostication on the Exxon Mobil (XOM) dividend both here at Seeking Alpha and within the financial press. All that spilled ink is no surprise given the dividend yield has crossed into double digits, long heralded as a sign that at the payout as unsustainable – or at least according to market consensus. Why so much interest? Correctly calling a dividend cut on what still is a cornerstone income position for many retirees would certainly win any analyst or financial blogger some internet brownie points. Nearly all do not have the conviction to put capital at risk on that call by being short.

As something of a dividend cut soothsayer myself – Vermilion Energy (VET) and Occidental Petroleum (OXY) were two public energy bearish calls this year from me that explicitly called prior fat payouts unsustainable – I’d relish in the opportunity to make that call here. Problem is, I don’t think you can. While bulls certainly have had blinders on when it comes to both operational problems at Exxon Mobil as well as the relative valuation compared to direct comps, to me it seems like the bears are well ahead of themselves in forecasting a cut.

Why Dividends Get Cut

For any analyst or independent investor to make accurate (and timely) dividend cut calls, there are two (very) simple catalysts that have to be watched out for. This is quite broad brush, but readers will find that Exxon Mobil does not really check any of these boxes.

Before we get started here, yes Exxon Mobil has burned through quite a bit of cash this year. My working model for the supermajor calls for about $17.0B in operational cash flow (inclusive of a working capital hit) in 2020 against $19.2B in capital expenditures and $14.8B in dividends.

(Bloomberg) — Traders across the world may be coming around to the idea that the U.S. election isn’t going to be the tumultuous event it was once expected to be.

Loading...

Load Error

But the real believers seem to be in emerging markets.

Optimism that the November election result will go uncontested and speculation a U.S. stimulus package will be agreed whatever the outcome are damping concern about fluctuations through year-end. Yet, while U.S. VIX futures declined last week as bets on likely price volatility eased, the drop was slower than for emerging markets.

“It does appear that emerging-market investors are slightly more sanguine about risks through the end of the year than what you’re seeing in developed markets,” said Nick Stadtmiller, a strategist at Medley Global Advisors in New York. “As long as global liquidity remains ample, and as long as global markets at least hold their ground, I would expect emerging-market assets to perform well. Yields on many emerging-market assets are high, especially relative to rock-bottom yields on developed market assets.”



chart: EM volatility index trades at a discount to the VIX gauge for U.S. stocks


© Bloomberg
EM volatility index trades at a discount to the VIX gauge for U.S. stocks

Falling volatility may give investors more confidence to put cash into an asset class enjoying one of its best phases since the virus-induced global sell-off in March. Citigroup Inc. said last week the worst is over for developing-nation assets and Morgan Stanley is betting volatility will continue to ease as the outcome of the November vote becomes clearer.

Emerging-market equities and currencies climbed to an eight-month high on Friday, while local-currency bonds had their best week since May on the prospect of U.S. fiscal stimulus. One-month implied volatility on the Brazilian real, South African rand and Russian ruble fell by the most among peers last week, signaling improved appetite for risk assets.

There has been a record number of dividend cuts during the ongoing coronavirus crisis, particularly in the energy sector, which is one of the most severely beaten sectors. A bright exception has been the group of U.S. refiners, which have defended its dividends so far. However, as Valero (VLO) is poised to post material losses this year, it is likely to cut its dividend, given also the uncertainty arising from the pandemic. On the other hand, the stock has been beaten to the extreme and thus it has collapsed at its 7-year lows. In this article, I will analyze why Valero has become a conviction buy around its current price.

The effect of the pandemic

The pandemic has caused an unprecedented collapse in the demand for refined products this year. According to the Energy Information Administration [EIA], the global demand for refined products is expected to slump by 8.3 million barrels per day on average this year, from 101.4 to 93.1 million barrels per day. This will mark the steepest decline in the global oil consumption in at least three decades.

In its last conference call, at the end of July, Valero stated that the demand for gasoline and diesel had recovered to 85%-90% of normal, after bottoming at 50% and 70%, respectively, in April. However, the demand for jet fuel remained 50% lower than normal. As a result, Valero planned to ran its refineries at an approximate 79% utilization rate in the third quarter. This is a daunting utilization rate, particularly for the third quarter, which is the strongest quarter for refiners in normal years.

It is also important to note that Valero generates the vast majority of its earnings from its refining business. In addition, most of its refineries are coastal and thus they lack the benefit of

(Bloomberg) — Traders across the world may be coming around to the idea that the U.S. election isn’t going to be the tumultuous event it was once expected to be.

Loading...

Load Error

But the real believers seem to be in emerging markets.

Optimism that the November election result will go uncontested and speculation that a U.S. stimulus package will have to be agreed whatever the outcome are damping concern about fluctuations through year-end. Yet, while U.S. VIX futures declined last week as bets on likely price volatility eased, the drop was slower than for emerging markets.

“It does appear that emerging-market investors are slightly more sanguine about risks through the end of the year than what you’re seeing in developed markets,” said Nick Stadtmiller, a New York-based strategist at Medley Global Advisors. “As long as global liquidity remains ample, and as long as global markets at least hold their ground, I would expect emerging-market assets to perform well. Yields on many emerging-market assets are high, especially relative to rock-bottom yields on developed market assets.”

Falling volatility may give investors more confidence to put cash into an asset class enjoying one of its best phases since the virus-induced global sell-off in March. Citigroup Inc. said last week the worst is over for developing-nation assets and Morgan Stanley is betting volatility will continue to ease as the outcome of the November vote becomes clearer.



chart: EM volatility index trades at a discount to the VIX gauge for U.S. stocks


© Bloomberg
EM volatility index trades at a discount to the VIX gauge for U.S. stocks

Emerging-market equities and currencies climbed to an eight-month high on Friday, while local-currency debt had its best week since May on the prospect of U.S. fiscal stimulus. One-month implied volatility on the Brazilian real, South African rand and Russian ruble fell by the most among peers last week, signaling improved appetite for

NEW YORK (Reuters) – Speculators reduced their net short dollar positions in the latest week to the lowest level since late July, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.

The value of the net short dollar position fell to $28.35 billion in the week ended Oct. 6, compared with a net short of $30.47 billion the previous week. U.S. net shorts hit a more than nine-year high of $33.68 billion in late August.

U.S. dollar positioning was derived from contracts of International Monetary Market speculators in the Japanese yen, euro, British pound, and Swiss franc, as well as the Canadian and Australian dollars.

In a broader measure of dollar positioning

that includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real, and Russian ruble, the U.S. dollar posted a short position of $28.56 billion, down from net shorts of $30.41 billion the week before.
=>

The speculative community has been short the dollar since mid-March.

In the week through Oct. 6, the dollar index <=USD> ultimately ended the period little changed, having followed see-sawing headlines about U.S. President Donald Trump’s COVID-19 diagnosis and the possibility that Congress might provide further fiscal stimulus.

The possibility of a new coronavirus relief bill has driven the dollar, among other safe-haven assets, lower since Tuesday. The dollar fell to three-week lows on Friday on stimulus optimism, and as investors bet that Democrat Joe Biden is more likely to win the U.S. presidency and offer a larger economic package. [FRX/]

(Reporting by Kate Duguid; Editing by Chris Reese and Sonya Hepinstall)

Copyright 2020 Thomson Reuters.

Source Article