Exxon faces ‘epic failure’ of $ 20 billion ten years ago

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Exxon (XOM) plans to take on a non-cash charge of $ 17 billion to $ 20 billion – a blow to a company that has long opposed depreciation. It is believed to be the largest such depreciation in Exxon history.

The natural gas market is depressed, with gas trading at around $ 3 per million UK thermal units – less than half the price when Exxon stepped in to buy XTO. Natural gas peaked at the end of 2005 at over $ 15 per million BTUs.

But today the world has a glut of natural gas due to the shale boom that released large amounts of fossil fuels in the United States.

Exxon’s “colossal depreciation of gas assets” is the “clearest recognition by management to date that the XTO deal has been an epic failure – needless to be reminded,” wrote the Raymond analyst James Pavel Molchanov in a note to clients Tuesday.

Most of the depreciation covers properties in the Appalachians, Rockies, Texas, Oklahoma, Louisiana, and Arkansas that were acquired under the XTO deal. The remainder of the charge relates to foreign gas properties in western Canada and Argentina.

Exxon is not the only oil company forced to reduce the value of its fossil fuel properties. Over the past year, Chevron (CVX), BP (BP) and shell (RDSA) have all suffered massive write-downs.

But not only is Exxon reducing the value of its natural gas portfolio, the company has completely removed some of these gas properties from its development plan. Exxon said in a statement that it may sell some of the assets, “based on buyers’ assessments.”

Reduce the budget

Instead of investing more money in natural gas, Exxon promises investors that it will “prioritize short-term capital spending over advantaged assets with the highest potential future value.”

Specifically, Exxon said it will focus on developing its vast oil resources in Guyana, ramping up production in the Permian Basin of west Texas and exploring in Brazil.

Exxon is also pulling out of its bold plans to ramp up investment despite low prices. The company now expects to spend $ 19 billion or less in 2021, and between $ 20 billion and $ 25 billion annually through 2025. That’s a far cry from Exxon’s March projection that it would spend $ 30 billion. 35 billion dollars per year until 2025.
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Exxon is working to cut costs – and jobs. The company reiterated that it plans to cut its global workforce by 14,000, or 15%, by the end of next year. This includes the loss of approximately 1,900 jobs in the United States, primarily at its head office in Houston.
The pandemic and the collapse in oil prices laid bare Exxon’s weakened financial position. The company posted quarterly losses for the first time in decades and was excluded from the Dow Jones Industrial Average after 92 years in that index.
As recently as 2012, Exxon was the world’s most valuable company. But today, it’s valued at just $ 161 billion – less than T-Mobile United States (TMUS), AbbVie (ABBV), Nike (OF) or Adobe (ADBE). Exxon’s market valuation has collapsed by more than half to $ 285 billion from a peak of $ 446 billion in mid-2014.

‘Precarious position’

Wall Street is hoping that belt tightening and a more conservative budget will be enough to save Exxon’s dividend, which is critical to its appeal to investors. But analysts are skeptical. This year marks the first time since 1982 that Exxon has not increased its dividend.

Raymond James analyst Molchanov warns that “Exxon cannot fund its dividend in 2021” without additional borrowing and selling assets.

For now, the capital markets are wide open and Exxon should be able to borrow to fund the dividend. But it cannot go on forever.

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“It’s about how much debt they want to take on,” said RBC Capital Markets analyst Biraj Borkhataria. “The dividend appears to be contested.”

And while Exxon is avoiding a dividend cut, its steep spending cuts raise questions about the company’s long-term future.

Oil companies must continually invest money in drilling – otherwise production dries up, hurting cash flow.

“The company is in a precarious position because of the deals it has made and the fact that it has been under-spending for many years,” Borkhataria said. “They must execute their existing projects to protect the long-term viability of the business.”

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