At Today’s Oil Prices, Exxon’s Money Machine Is Broken

Exxon’s money machine is broken. At least at these oil prices. The oil giant posted a loss of $680 million today, its second quarterly loss in a row, following a $1 billion hit in the second quarter. Exxon received an average $37 per barrel for its U.S. crude oil in the third quarter, a big improvement on its average $21/bbl in the second quarter — but not enough. 

CEO Darren Woods in a prepared statement said the company was taking bold measures to navigate the “unprecedented down cycle.” Those moves include broad layoffs that will hit some 14,000 positions out of 74,000 nationwide, including 1,900 cuts to come in the U.S., mostly at its campus in The Woodlands, north of Houston. Already last month Exxon suspended employee retirement plan matching. 

During the last oil downturn of 2016, the company chose to maintain a high level of investment — confident that as the cycle turned up its steadfastness would be rewarded. Not this time. Exxon during 2020 has slashed its capital spending, to about $17 billion a year from a pre-pandemic level of closer to $30 billion. Unable to generate enough cash, Exxon has grown its borrowing to more than $60 billion in order to keep up with its $3.7 billion in quarterly dividend payments. 

At a current $32.28 per share, down more than 50% in the past year and off 2% today, Exxon shares yield 10% — high enough to give Woods cover to cut the payout if needed. So far Exxon has resisted any suggestion that it consider cutting its $3.48 annual dividend — something it hasn’t done, according to company records, since at least the 1970s. Exxon has also told investors that it will make those dividend payments without adding on any more “gross” debt. 

If that’s the case, then it looks like Exxon is going to need to start selling assets to make ends meet. Jason Gabelman, analyst at Cowen & Co., figures that unless oil prices ($36/bbl WTI today) stage a remarkable comeback Exxon will end up about $5 billion in cash short of that objective in 2021. And that assumes success in Exxon’s stated plan to divest $15 billion in assets. 

As we’ve written about in recent weeks, there are precious few buyers in the oilpatch right now for any assets that aren’t already generating meaningful cash flow at today’s low oil prices. Any early stage project requiring additional cash outlay will be deeply discounted by potential buyers who are themselves strapped for cash right now, or who see better investment options outside of fossil fuels altogether. 

So if Exxon needs to raise cash, it’s best bet might be to sell a portion of one of its unheralded assets — the Kearl oil sands project in Alberta, Canada. According to Credit Suisse
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analysis, Kearl will generate $1.5 billion in free cash flow over the next three years while producing 270,000 barrels per day — even at these low commodity prices. Exxon owns 30% of Kearl outright, and controls the other 70% via its 70% stake in publicly traded Canadian company Imperial Oil. Selling a portion of Kearl could help Exxon make ends meet, and would also likely help in the ESG arena too, as oil sands projects tend to have higher levels of carbon intensity than average. 

If it can find a buyer with cash, Exxon could also sell a portion of its oil development offshore Guyana, which has begun production but won’t deliver outright free cash flow to Exxon until 2024, according to analysts. 

There’s one part of the portfolio Exxon no doubt wishes it could have sold already — its North American “dry gas” assets, meaning fields that only contain dry natural gas with virtually no oil or other liquid hydrocarbons. Exxon acquired myriad dry gas shale acreage in its 2009 acquisition of XTO Energy for $41 billion, which now looks to have been an unfortunate mistake. 

Exxon likes to pride itself on buying assets that can turn a profit in almost any commodity price environment. But there’s been so much “associated” natural gas discovered alongside oil reserves in places like the Permian basin that dry gas acreage doesn’t have much value at current prices. In its earnings release today Exxon stated that in the interest of prioritizing its highest value assets, it would be assessing its dry gas portfolio during the fourth quarter. As the SEC only lets oil companies book reserve value for fields they intend to drill within five years, were Exxon to remove certain dry gas fields from its long-term development plan it could have to debook significant reserves and write down the value of as much as $30 billion worth of assets. Could be the perfectly terrible ending to this annus horribilis for Big Oil.