What a mess. ExxonMobil XOM revealed today the disastrous extent of 2020. For the year it posted a net loss of $22.4 billion, amid a 32% slump in revenues and a 5% decline in oil and gas output to 3.76 million barrels per day.
In order to conserve cash, the company slashed its planned capital spending by a third to $21 billion — which was still more than they could afford. In the fourth quarter, Exxon only generated $4.1 billion in cash flow from operations — insufficient to cover its capex at $4.7 billion, or its dividend, thus necessitating the issuance of an additional $3.2 billion in debt.
Speaking of that dividend, whenever management teams talk of “defending” a dividend, it can mean only one thing: it’s too high. That’s certainly the case at Exxon, which has stubbornly continued to pay out a dividend of $14.8 billion ($3.48/share, or 7.5%) that it obviously can’t afford, while laying off thousands of employees.
It’s easy to spend money you don’t have when you’re sitting on a balance sheet as big as Exxon’s, but it has to be embarrassing to CEO Darren Woods that the company is now burdened with $62 billion in net debt, versus just $12 billion a decade ago. Yet Woods, in the earnings release today said that actions he took in 2020 enabled ExxonMobil to “emerge a stronger company.”
“We remain focused on increasing long-term value for our shareholders by investing in our highest-return assets, preserving the strength of the balance sheet, and paying a reliable dividend,” he said in the statement. This is empty talk that could have been inserted into any quarterly report over the past 50 years.
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It is fair to criticize Exxon; for more than a decade it has heralded itself as the oil industry’s low-cost leader with mega-scale assets all but immune to any commodity price downturn. This was supposed to be the last company from which investors would expect to see what’s been revealed as a devastating $19 billion in asset write-downs, nearly all of it tied to dry gas fields in the U.S. acquired at the height of the shale gas boom a decade ago. For years Exxon had planned to develop those fields. Now it doesn’t. Their spin: “driven by the growing strength of ExxonMobil’s investment portfolio, less strategic assets were removed from the company’s upstream development plan.”
It’s cold comfort that these $19 billion in write downs are “non-cash impairments.” It’s as if a family were to buy two houses, live in just one of them, let the other sit empty while they pay to maintain it, and then after a decade just write off the value of the empty house as a mulligan. Presumably Exxon would have sold off their mistake to a greater fool if they could have found one.
A couple weeks ago emerged the news that the Securities Exchange Commission was investigating allegations that Exxon may have misled investors by overpromising then underdelivering on one of its bright spots — a 275,000 acre position in the Permian Basin oilfields that former CEO Rex Tillerson acquired from Fort Worth’s billionaire Bass Brothers for $6 billion in 2017. At the time of that deal Exxon said the “highly contiguous” nature of the Bass acreage would allow for profitable drilling even at $40/bbl oil. Hyping the potential for big growth, CEO Darren Woods first projected 600,000 barrels per day out of the Permian by 2025. Then in 2019 he said it could be 1 million bpd by the end of 2024. That looks unlikely given Exxon’s announcement today that Permian output is running at 418,000 bpd.
Of course there are bright spots. Exxon in recent years has made some historically awesome discoveries off the coast of Guyana, where they are now producing 120,000 bpd, with another 440,000 bpd to come online by 2024. These are highly profitable barrels — the company projects that 40% of 2025 cashflow will come from such near-term startups.
This gives Woods an excuse not to slash capex as deeply as some activist investors are demanding. Hedge fund giant D.E. Shaw is agitating to see capex reduced to as low as $13 billion with another $5 billion carved out of annual operating expenses. Both Shaw and another activist fund called Engine No. 1 are pushing for board seats. Meanwhile, Woods is playing catch up with the likes of BP, Total, Occidental and Equinor when it comes to participating in the now inevitable transition to a carbon-constrained future. Exxon announced today the creation of a Low Carbon Solutions business focused on carbon capture and sequestration, and the intention of reducing upstream greenhouse gas emissions by 30% by 2025.
What about the news over the weekend that Woods last year held talks with Chevron CVX CEO Mike Wirth about potentially merging the two companies into a grand American oil champion to rival Saudi Aramco? That ship has sailed, according to a person in the know, leaving little more than the wet dreams of investment bankers fantasizing about the fees they could have collected in combing Chevron’s $168 billion market cap with Exxon’s $196 billion. It’s a consolation prize for investors, but at least Exxon is still on top, for now.
At midday Exxon shares are up 3.40% to $46.43.