Under Financial Pressure, Exxon Keeps it in the Ground

First it was shale; now it’s oil sands. Battered by the pandemic-inspired drop in demand and (until recently) bargain-basement oil prices, Exxon Mobil has been forced to offset its mounting losses by writing down assets in natural gas and oil sands, laying off workers, and reducing capital spending.

Based on last year’s dismal results – a $22 billion loss and a drop in market value of over $120 billion – Exxon Mobil Corp. announced a $19.3 billion write-down of the value of its natural gas properties in Texas, Argentina, and western Canada.

In another dramatic gesture, Exxon removed 98% of its Western Canadian oil-sands crude from its books, a drop of over 7 billion barrel-equivalents. At today’s oil prices, producing oil from tar sands doesn’t make economic sense. Even with the reduction in proven reserves, Bloomberg estimates that Exxon has enough reserves to sustain current production levels for 11 years, down from 15.5 years a year ago.

Despite these losses, Exxon pledges to preserve its $15 billion a year dividend payout, which is the third largest in industry, and a powerful attraction for investors. To prop up the dividend, Exxon has been selling assets, taking on debt, and laying off workers, and is now cutting project spending to the lowest level in 15 years.

In 2010, Exxon paid $41 billion — $30 billion in Exxon stock plus assuming over $10 billion in XTO debt — for U.S. shale producer XTO Energy. Overproduction from the shale boom sent natural gas prices into a steep decline, and Exxon’s ambitious play for a piece of the action failed to pay off. The XTO deal, which was the shale industry’s biggest merger, has proved to be a really bad investment for Exxon. A whistleblower complaint now alleges that Exxon fraudulently overvalued its natural gas assets for years, refusing to write down these assets even though a huge decline in natural gas prices clearly affected their value.

Although the dividend is intact for now, Exxon is on the ropes: burdened by $70 billion in debt, it must wait for sustained higher oil prices to pull itself out of the slump. Before the pandemic, Exxon Mobil CEO Darren Woods was counting on rising demand for oil and gasoline, but that prospect is now uncertain. Some analysts speculate that peak oil demand has already occurred. And renewable are coming on strong: last year, Exxon was replaced as the world’s largest energy company by NextEra Energy, a renewables company.

Despite its place in the worst-performing sector in the S&P 500 (energy lost 37% last year while the index as a whole gained 15%), Exxon has defied investor pressure to prepare for the inevitable transition to renewable forms of energy. An aggressive shareholder initiative from CalSTRS and Engine No. 1 seeks to elect more climate-aware directors to Exxon’s Board. CalSTRS issued a strong statement denouncing Exxon for last year’s $22 billion loss and for failing to “position the company for the global energy transition.” It remains to be seen whether changing four seats on an 11-person Board of Directors would be enough to cause Exxon to alter its heads-down determination to exploit its reserves and continue business as usual.