Exxon Mobil's financial picture

Exxon Mobil Corp., the highest-weighted energy company in the S&P 500 index, saw its free cash flow vastly improve in the first quarter due to a combination of higher operating cash flow and lower capital expenditures. The period's operating cash flow grew to $9.3 billion from $6.3 billion in the first quarter of 2020, and capital expenditures were $3.1 billion vs. $5.9 billion. Management is budgeting capital expenditures of $16 billion to $19 billion this year, which is below its long-term $20 billion to $25 billion target.

However, it is early to draw any conclusions that it can continue driving higher free cash flow to support returning cash to shareholders. Examining Exxon Mobil Corp.'s free cash flow over the last 20 years, it has frequently outspent free cash flow on dividends and share repurchases.

Exxon Mobil will need to produce strong free cash flow to build on the progress it made in the first quarter when it lowered debt by more than $4 billion to $63.3 billion. Over the past decade, Exxon Mobil's debt has climbed more than fourfold from 2011's figure of $15 billion. Its debt/total capital has soared to nearly 30% from less than 10% during that time.

Once boasting the highest credit ratings, Moody's Investors Service downgraded Exxon Mobil's rating to Aa2 from Aaa a year ago. In February, S&P Global Inc. lowered its rating a notch to AA- from AA.

Meanwhile, management's capital allocation has not generated a higher return on capital. After the return on invested capital rose during the early 2000s, it has fallen precipitously since then.