The energy company run by CEO Darren Woods said it would keep its dividend.

Photo: brendan mcdermid/Reuters

Exxon Mobil’s XOM 0.50% stubbornly optimistic streak already was on full display earlier this year when it kept its chunky dividend amid a historic rout in oil prices.

It could raise the payout soon, bringing its streak to 38 years and maintaining coveted Dividend Aristocrat status. While that attitude may not harm the company’s near-term health, it could have longer-term, insidious consequences.

The energy giant, despite reporting a second consecutive quarterly loss, on Friday said it would keep its dividend. True, that loss was a mere $1.1 billion, less than half the expected $2.3 billion, but that was partly thanks to another headstrong gesture: The company added $1.9 billion to its inventory valuation, citing “rising commodity prices.”

While different accounting rules and asset mixes complicate the calculation, its European competitors have taken multibillion-dollar write-downs and U.S. peer Chevron took substantial impairment charges on Friday, citing commodity prices that were “not back to pre-pandemic levels.”

If Exxon Mobil sticks to its dividend plan for the balance of this year, it will add up to a roughly $15 billion outlay at a time when its balance sheet looks bad. Everything is relative, though. Exxon’s net debt as a percentage of capital is expected to rise to 27% at the end of 2020 from 19% at the end of 2019, according to Raymond James, which adds that this would be the highest leverage ratio since Exxon merged with Mobil in 1999.

Still, that only would put Exxon’s net debt relative to enterprise value in the middle of its peer group by the end of 2021, according to RBC, which also estimated that Exxon could add another $15 billion of debt on top of its 2020-2021 cash burn and still maintain a “manageable capital structure.”

Exxon’s free cash flow will likely be negative this year. With buybacks near zero, though, it should soon be able to cover shareholder payouts again.

Yet while the cash can be found, generous payouts come at the cost of long-term profitability. Because Exxon is also determined not to raise any more debt, it must be thrifty. The company already has announced plans to reduce capital spending by 30% this year. Cuts have mostly been in so-called short-cycle, unconventional investments, where it is relatively easy to ramp activity back up again.

But one has to wonder how much longer Exxon CEO Darren Woods can keep doing this until the company must sacrifice long-term investments so vital to success in a cyclical business. It is particularly concerning because its competitors are already ahead: Many of Exxon’s peers have invested much more heavily in recent years and are “bearing the fruits of those investments,” according to RBC.

Exxon can cover its tab, but opportunity costs are real. Investors need to understand the trade-off.

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—Jinjoo Lee

Corrections & Amplifications
The chart in this article shows free-cash-flow minus dividends paid. An earlier version of the chart incorrectly said the numbers indicated a free-cash-flow-to-dividend ratio. (Corrected on July 31)

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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