Petroleum

Exxon Mobil: The Downfall of an Oil Giant

Mounting Pressure

Exxon Mobil is struggling. Within the past few years, energy analysts, environmentalists, and investors have been beating up on fossil fuel companies. However, Exxon Mobil has experienced one of the most visibly dramatic declines over the past decade. The downturn in global oil prices has plagued the Houston-based energy giant with a wide range of financial challenges. Amid falling rates of production and a stock price that has been one of the worst performers in the energy industry, Exxon Mobil has taken on billions of dollars in fiscal write-downs in an attempt to recover some of the losses that have occurred.

The rebalancing of the global economy and the fossil fuel industry in general have contributed to a period of economic uncertainty for many of the world’s energy giants. Prior to the period of fossil fuel market uncertainty, the rise of developing nations like Brazil, China, and India created a rise in fossil fuel company profits because of increasing demand for oil. Moreover, the development of new technologies to extract hard-to-reach fossil fuel reserves has led to tremendous growth in the American shale oil revolution and initiated a new wave of global oil and natural gas production. New technology for oil drilling and hydraulic fracking has opened up vast new reserves of oil and natural gas in countries all around the world. However, as fossil fuel companies have been able to find new oil and gas reserves, new questions have started to mount about the future of fossil fuels.

Source: Wikipedia

Fossil Fuel Growth Concerns

Projections related to the future demand for oil and gas have varied widely in recent years. In 2019, reports from the U.S. Energy Information Administration predicted that China’s increasing demand for fossil fuels would drive the increasing demand for fossil fuels well into the future. While China’s rapid population growth and increasing levels of economic development already account for roughly 25 percent of the world’s total energy consumption, recent projections conveyed that a new wave of development would continue to drive China’s oil and gas consumption for decades. On the other hand, an increasing number of energy analysts say that the new economics of the oil industry could limit the future growth of the fossil fuel industry.

Oil companies thrive on certainty. The increasing levels of uncertainty with regards to the consumption of fossil fuels and the growth of the global economy in general have severely impacted investor confidence in companies like Exxon Mobil. Because of this uncertainty, oil prices collapsed dramatically by over 65 percent between 2014 and 2016 (Arezki, 2016). As a result of this collapse in oil prices, Exxon Mobil’s total profit margins have also been sinking. Weak performance across the majority of Exxon Mobil’s business lines led the company to post its worst quarterly profit results in years at the beginning of 2020. In addition to fears that have been propelled by the notion of electric vehicle sales reducing global oil demand and new bipartisan plans to ban fossil fuel-powered vehicles in some of the world’s biggest cities, Exxon Mobil’s struggles date back to the start of the American shale revolution.

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The Struggle Begins

The origin of Exxon Mobil’s current problems can interestingly be linked to the surge in fossil fuel production that ended a long period of domestic oil and gas shortages in the United States. As new technological advancements created a seemingly endless source of oil and gas resources, energy prices plummeted. Now, in addition to the global oil supply glut, Exxon Mobil has had to deal with mounting pressure from environmentalists and investors concerned with the company’s falling stock price. As oil prices have continued to fall and concerns about global economic growth have also continued to accumulate, Exxon Mobil shares have plummeted to their lowest level in over a decade (Garber, 2020).

Record Profits and Endless Power

While Exxon Mobil has continued to struggle in recent years, the oil giant was once known as the most profitable corporation in the history of the world. In 2012, Exxon Mobil posted its second-highest annual profit in the company’s history (exceeded only by 2008’s record) with $45 billion, which surpassed the combined profits of Wal-Mart and Royal Dutch Shell, the world’s first and second largest companies during that year (Juhasz, 2013). Moreover, with a reported $450 billion in revenue during the 2012 reporting year, Exxon Mobil would have been considered the 27th largest economy in the world if the company was considered its own nation (Juhasz, 2013). With this level of funding came an extraordinary amount of power. President George W. Bush famously said in 2001, “Nobody tells those guys what to do,” in reference to Exxon Mobil.

Over the past decade, Exxon Mobil has been able to return upwards of $275 billion of its total $318 billion of net income to investors through stock repurchases and hefty dividends (Johnston, 2018). With the company’s high dividend yield, Exxon Mobil’s stock has been known as a strong dividend aristocrat for many years. However, despite the company’s ability to return value to shareholders in the form of dividends, the rising costs of doing work in the oil industry has taken a significant toll on the company’s fee cash flows. Rising capital expenditures and the increasing cost of oil and gas extraction have caused some investment banks and energy analysts to question whether Exxon Mobil will be able to continue paying such hefty dividends to its shareholders. Unless oil prices rise in the near future, the company seems destined to take on an even greater amount of debt.

Source: Wikipedia

A Dramatic Decline

Between July 2014 and February 2020, Exxon Mobil’s stock dropped by nearly 42 percent, while the Dow Jones Industrial Average (a well-known index that measures the stock market performance of 30 of the largest companies listed on American stock exchanges) rose by nearly 90 percent. Exxon Mobil’s free cash flows have averaged around $183 billion during the past ten years, which represents a $92 billion shortfall from what the company has returned to investors through dividends and stock repurchases (Johnston, 2018). Overall, the long-term outlook for Exxon Mobil’s finances doesn’t look promising unless actions are taken to depress the global supply of oil, which would cause prices to rise.

Legal Troubles

In addition to fighting headwinds related to low oil prices and concerns that the global economy is moving away from oil altogether, Exxon Mobil has also been plagued with a tumultuous lawsuit that has claimed that the company had been working for years to mislead investors about climate change. Exxon Mobil has vigorously denied allegations that it had deceived its shareholders and lied to the public about the effect that climate change could have on its oil business. While this is only the second climate change-related lawsuit to ever reach trial in the U.S., fossil fuel executives worry that it could be just the start of a significant list of other pending lawsuits that aim to hold oil and gas companies responsible for the adverse effects of climate change (Schwartz, 2019).

Exxon Mobil’s case originated in 2015, after reporters from the Los Angeles Times published an article that highlighted how Exxon Mobil scientists were secretly evaluating how climate change would affect its oil business, while concurrently, downplaying the potential impacts of climate change to investors and the general public. One of the main issues that came out of this Exxon Mobil court case was the fact that Exxon Mobil employees had used climate-related data to make changes to its long-term business outlook, even as the energy giant strategically provided funding to private organizations to spread uncertainty about carbon emissions and climate change in general.

After this lawsuit was initiated, Exxon Mobil claimed that it had stopped providing funding to all outside groups that had denied the existence of climate change. While Exxon Mobil now publicly acknowledges the facts about climate change, the prominence of these new accusations has significantly threatened the reputation of this prominent energy giant. In light of Exxon Mobil’s lawsuit and amid the decline of global oil prices, hedge fund managers have been dumping the company’s stock. Jim Cramer, a prominent CNBC television host and former hedge fund manager, has publicly stated that, “I’m done with fossil fuels. They’re done,” he stated. “The world’s turned on them” (Crowley, 2020). Cramer has also labeled fossil fuel stocks “as the new tobacco.”

Source: Wikipedia

Spending Spree

As a surprise to many investors, Exxon Mobil has continued to pump billions of dollars into new projects, even as it continues to reveal abysmal quarterly reports. While other fossil fuel giants like Chevron and Royal Dutch Shell have been tightening their budgets amid the global oil price slump, Exxon Mobil has been going on a spending spree.

In his $35 billion-a-year capital investment endeavor that seeks to implement a series of oil and gas projects in the nations of Guyana and Mozambique, Chief Executive Officer Darren Woods has remained confident that Exxon Mobil can revitalize its business operations. Woods was elected Chairman and CEO of Exxon Mobil in January 2017, after his predecessor Rex Tillerson was named U.S. secretary of state. Since taking over from Tillerson’s reign, Woods has moved forward with a plan that aims to take advantage of a counter-cyclical strategy. This strategy employs a thesis that states how it is necessary to make critical investments while prices are low and other oil companies are tightening their budgets. Following the cyclical rebound, Exxon Mobil would be expected to earn more profits from its previous investments in oil-related infrastructure.

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Woods’ Long-Term Vision

On a quarterly earnings conference call, Woods said, “While we would prefer higher prices and margins, we don’t want to waste the opportunity that this low-price environment provides” (Crowley, 2020). Exxon Mobil has been in the process of utilizing their financial capacity to take on new debt in pursuit of the company’s long-term goals. However, even with this strategy, it has become clear that it could take a significant amount of time before Exxon Mobil’s investments come to fruition. Similar to the decline of Halliburton, Exxon Mobil’s balance sheet has continued to shift towards large quarterly losses, as the company has highlighted weakness in the petrochemical industry and oil refining in general.

A Resilient History and Questionable Future

Since it was first established as the Standard Oil Company in 1870 by John D. Rockefeller and his partners, Exxon Mobil has remained as one of the world’s most dominant oil companies. Even as the volatile energy industry has come to the detriment of many smaller energy competitors, Exxon Mobil has persisted as a resilient company that has helped to fuel global energy needs. However, as the world’s largest publicly traded oil producer, Exxon Mobil has come under intensifying pressure in recent years. Weak oil production results and numerous failed projects in countries like Canada, Mexico, and Russia have adversely impacted the company’s balance sheet.

While failed projects and persistently low oil prices have been adversely impacting Exxon Mobil, the company’s CEO remains confident that its investments in Qatar, Mozambique, Guyana, and Papua New Guinea will end up paying off for the company and its shareholders over the long run. However, until financial data becomes available to show that Exxon Mobil’s investments are making progress, energy analysts and investors continue to cast doubt over the company’s falling revenues, increasing debt, and dwindling public sentiment.

Sources

Arezki, R. (2016). “Rethinking the oil market in the aftermath of the 2014-16 price slump.” International Growth Centre.

Clemente, J. (2019). “China Soaring Past Japan In Liquefied Natural Gas Imports.” Forbes.

Crowley, K. (2020). “A Tale of Two Oil Giants With Two Strategies That Aren’t Working.” Bloomberg.

Du, L., & Huang, G. (2019). Exxon Goes Deep in Brazil. Bloomberg Businessweek.

Exxon Mobil. (2006). “About Exxon Mobil.” Exxon Mobil Corporation.

Garber, J. (2020). “Exxon Mobil closes at lowest since October 2013.” Fox Business.

Johnston, M. (2018). “Why Exxon Mobil May Fall From Grace Like GE.” Investopedia.

Juhasz, A. (2013). “What’s Wrong With Exxon?” Advocate: 00018996, Issue 1069.

Scheyder, E. (2018). “Exxon CEO struggles to reverse Tillerson’s legacy of failed bets.” Reuters.

Schwartz, J. (2019). “Fossil Fuels on Trial: New York’s Lawsuit Against Exxon Begins.” New York Times.

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