Exxon faces $20 billion hit from 'epic failure' of a decade in the past

Exxon (XOM) plans to take a non-cash cost of $17 billion to $20 billion — an enormous hit for an organization that was lengthy against taking writedowns. It is believed to be the biggest such writedown in Exxon historical past.

The pure fuel market is depressed, with fuel buying and selling at about $3 per million British thermal items — lower than half the value on the time Exxon swooped in to purchase XTO. Pure fuel peaked in late 2005 at greater than $15 per million BTU.

However in the present day the world has a glut of pure fuel because of the shale increase that unlocked huge quantities of fossil fuels in the US.

Exxon’s “colossal fuel asset impairment” is administration’s “clearest acknowledgement thus far that the XTO deal was an epic failure — not that any reminders of this are wanted,” Raymond James analyst Pavel Molchanov wrote in a notice to shoppers Tuesday.

The majority of the writedown covers properties in Appalachia, the Rockies, Texas, Oklahoma, Louisiana and Arkansas that have been acquired within the XTO deal. The remainder of the cost is for abroad fuel properties in western Canada and Argentina.

Exxon is hardly the one oil firm compelled to whittle down the worth of its fossil gas properties. Over the previous 12 months, Chevron (CVX), BP (BP) and Shell (RDSA) have all taken large writedowns.

However not solely is Exxon slashing the worth of its pure fuel portfolio, the corporate has fully eliminated a few of these fuel properties from its improvement plan. Exxon mentioned in an announcement that it could promote a few of these property, “contingent on purchaser valuations.”

Shrinking the funds

As a substitute of plowing extra money into pure fuel, Exxon is promising buyers it’s going to “prioritize near-term capital spending on advantaged property with the very best potential future worth.”

Particularly, Exxon mentioned it’s going to give attention to growing its huge oil sources in Guyana, accelerating manufacturing within the Permian Basin of West Texas and a few exploration in Brazil.

Exxon can be retreating from its daring plans to ramp up funding regardless of weak costs. The corporate now expects to spend $19 billion or much less in 2021 and between $20 billion and $25 billion a 12 months by way of 2025. That is a far cry from Exxon’s March projection that it might spend $30 billion to $35 billion a 12 months by way of 2025.

Trump said the stock market would crash if Biden won. The Dow just had its best month since 1987.

Exxon is scrambling to chop prices — and jobs. The corporate reiterated that it plans to shrink its international workforce by 14,000, or 15%, by the top of subsequent 12 months. That features slicing about 1,900 jobs in the US, largely at its Houston headquarters.

The pandemic and crash in oil costs has uncovered Exxon’s weakened monetary state. The corporate posted quarterly losses for the primary time in a long time and it acquired kicked out of the Dow Jones Industrial Common after 92 years in that index.

As lately as 2012, Exxon was the world’s most respected firm. However in the present day it’s valued at simply $161 billion — smaller than T-Cell US (TMUS), AbbVie (ABBV), Nike (NKE) or Adobe (ADBE). Exxon’s market valuation has crumbled by greater than half to a staggering $285 billion since peaking at $446 billion in mid-2014.

‘Precarious place’

Wall Avenue is hoping the belt-tightening and a extra conservative funds might be sufficient to avoid wasting Exxon’s dividend, which is important to its enchantment to buyers. However analysts are skeptical. This 12 months marks the primary time since 1982 that Exxon failed to extend its dividend.

Molchanov, the Raymond James analyst, warns that “Exxon can’t fund its dividend in 2021” with out further borrowing or asset gross sales.

For now, the capital markets are huge open and Exxon ought to be capable to borrow to fund the dividend. However that may’t final perpetually.

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“It is a query of how a lot debt they wish to tackle,” mentioned RBC Capital Markets analyst Biraj Borkhataria. “The dividend appears challenged.”

And even when Exxon avoids a dividend discount, its sharp spending cuts elevate questions concerning the firm’s long-term future.

Oil firms want to repeatedly plow cash into drilling — in any other case manufacturing dries up, hurting money flows.

“The corporate is in a precarious place due to the offers they’ve accomplished and the actual fact they’ve underspent for a few years,” mentioned Borkhataria. “They must execute on their present tasks to guard the long-term viability of the enterprise.”