Published: September 12th, 2020
Bad bets on the post-pandemic recovery have left Exxon Mobil Corp staring down the barrel of a $48 billion revenue decline between now and the end of calendar 2021.
Wall Street estimates from Refinitiv show the oil giant now faces deep cuts and project deferrals as it struggles to adjust to plummeting energy demand in the wake of COVID-19.
The situation is so dire that analysts have questioned whether the company’s formerly rock-solid dividend will be possible this year; an amazing turn of events for what was once the planet’s most valuable company.
Over the past ten years, Exxon has endured a series of setbacks, with CEO Darren Woods battling to bring the company back to its glory days with big bets on pipelines, plastics, and the hoped-for resurgence of U.S. shale.
But the company’s ability to finance its ambitious expansion plans is now in doubt. In 2020 alone Exxon borrowed $23 billion to cover operating costs, doubling its debt load. It posted its first-ever back-to-back quarterly losses in July, and now faces $1.85 billion annual loss, according to Refinitiv.
If projections are accurate, next year heralds another shortfall of about $48 billion once commitments to shareholder pay-outs and expansion costs are factored in. This week the company began what’s expected to be a painful review of where it can cut expenses globally, with a dividend cut looking increasingly likely.
This year's coronavirus-induced cratering of oil demand has shredded plans to spend about $30 billion annually through 2025 to get production and earnings back on track. CEO Woods’ had banked on expanding the company’s footprint in PetChem, oil processing, and U.S. shale and liquefied natural gas (LNG). At the time, prospects for growth in those markets looked more promising.
Now the company has to re-think and work out how it’s going to operate in an environment of minimal demand for oil, gas and plastics. After holding its place for 92 years, Exxon has been dropped from the Dow Jones index of top U.S. industrial companies. Close to ten per cent of its workforce now faces harsh reviews that could see headcount slashed by thousands. It’s also cancelled the generous retirement benefits that once kept Exxon ‘lifers’ with the company for 30 years or more.
In a statement, Exxon said it is ‘ … sticking with all our capital allocation priorities, which include investing in promising projects, sustaining a strong balance sheet, and paying a reliable dividend’.
On the internal review now underway of significant new projects, the company says its taking steps to capture additional cost savings and ‘maximise efficiency’ while it waits for energy demand to bounce back.
Oil prices have sunk by 35 per cent since the beginning of 2020, with demand going into freefall on the back of lockdown measures spurred by the pandemic. Exxon isn’t the only casualty. Total, Shell, BP, and Repsol have all slashed billions off the valuation of their oil and gas properties.
To hedge against what’s likely to be permanently-reduced fossil fuel demand, Europe’s majors have been steadily building up portfolios of renewable energy and power generation. BP is ahead of the pack with plans to reduce fossil fuel production by 40 per cent by 2030.
Adding to Exxon’s woes, analysts have looked at the balance sheet and say cash from operations this year will be ca. $20 billion below the financial threshold needed for its year-end shareholder dividend.
The company's stock price is down more than 55 per cent since Woods took on leadership of the oil giant. Some $23 billion has been raised to strengthen finances, but the embattled CEO says he won’t borrow more, even while insisting that the dividend is a non-negotiable commitment.
Analysts think all those promises will be difficult to keep. In a note to investors, commodity analysts at Adams Funds in New York said that ‘in a $41-dollar-per barrel crude market there’s no way all those puzzle pieces can fit together’.
Something has to give, they say. Either Exxon cuts its dividend, or the share price unexpectedly rises. Which scenario is more likely, investors will have to look at the numbers and decide.
Many investors hold Exxon stock mainly to reap the dividend. What will happen if they decide to dump it en masse? Those worries have placed the company on the watch list of a growing number of leading investment firms.
Exxon says spending on its Permian Basin shale field projects will be slashed by ca. $3 billion, a significant drop from the original $7.3 billion budget.
The number of drilling rigs will come down to 15 or less from the 55 currently in operation, with a company statement saying Exxon’s retrenchment in shale could continue for the foreseeable future.
Spending cuts will further limit its oil, refining and PetChem businesses, putting even more pressure on the company to divest from less-than-certain operations. A planned $10 billion Chinese chemical plant is still subject to licencing permission and could end up getting the chop.
When he launched his vision for the company in 2017, CEO Woods said that all of Exxon’s core businesses could be ‘powerhouses.’
He decided to keep the company’s growth targets last year, assuming potential 2020 earnings north of $25 billion, but on the assumption that crude prices would stay at $60 a barrel. Those targets have drifted ever further into the distance since the pandemic hit.
Analysts at RBC Capital Markets now say Woods needs to dial back; forecasting project outlays in 2021 will be half the original outlook.