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.
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.
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.
“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.”