“We haven’t seen anything like what we’re experiencing today.”
ExxonMobil’s CEO Darren Woods said his company is expecting oil demand to decline by 20 to 30 percent because of the global pandemic and economic downturn. In response, Woods announced that the oil major could cut spending by 30 percent this year, with much of the pullback concentrated on its Permian operations. Exxon had held out longer than its rivals, waiting a month after the collapse in prices to revise down its spending program.
Woods did not reveal how much Exxon would spend in the Permian this year, but RBC Capital Markets analyst Biraj Borkhataria estimates that the company is likely spending around $6 billion, “and we see no reason why capex and the rig count cannot be reduced by 50% at a minimum in 2020,” according to Reuters.
The spending reductions could translate into Exxon’s Permian production coming in 15,000 bpd below its target of 360,000 bpd in 2020. Next year, the impact will be more pronounced, with cuts translating into 150,000 bpd lower than the 600,000-bpd target. “The reductions we are making in the Permian will not compromise the scale or functional excellence” of Exxon’s operations, Woods said.
Exxon now plans on spending $23 billion in 2020, down from a previously expected $33 billion. The move comes after the oil major suffered credit downgrades and scrutiny over its dividend program.
The major has refused to cut its dividend despite the fact that the company was not generating enough cash to cover both its spending program and its shareholder payouts. For years, Exxon and other oil majors have had to paper over the gap by selling off assets and taking on more debt.
A new study from the Institute for Energy Economics and Financial Analysis (IEEFA) finds that both Exxon and Royal Dutch Shell saw their cash flow fall far short of shareholder payouts last year. For instance, Exxon dished out $15.24 billion to shareholders in dividends and share buybacks in 2019, but only generated $5.35 billion in free cash flow. Royal Dutch Shell was in a similar boat – generating $19.2 billion in free cash flow, but sending $26.56 billion to shareholders.
BP, Total, and Chevron generated enough cash to cover their dividends in 2019, but BP and Total posted a “deficit” the year before. “For the oil and gas supermajors, the troubling and persistent gap between free cash flows and shareholder payouts has been one of many factors contributing to sustained stock market underperformance,” IEEFA analysts wrote.
The majors have taken on debt as a result. In the past few weeks alone, ExxonMobil, Royal Dutch Shell, BP and Total have taken on $32 billion in new debt to cover their spending programs and dividends.
ExxonMobil’s Darren Woods justified the strategy in a CNBC interview. “A lot of our shareholders are retail shareholders — people who depend on that dividend — so we’ve been pretty committed to maintaining that and if necessary in the short-term using the balance sheet to support it,” Woods said Tuesday on CNBC’s “Squawk Box.”
Meanwhile, Exxon is willing to take on short-term pain in order to consolidate its position in the Permian. Exxon has adamantly resisted several proposals from smaller shale companies for help from the Trump administration. Exxon and the American Petroleum Institute, a lobby group over which Exxon has a lot of influence, have argued against U.S. mandated production cuts as part of a global agreement with OPEC+, as well as U.S. tariffs on imported oil.
“Our position has always been that free markets for our industry work best,” Woods said on Tuesday. “It allows the free flow of product, it also ensures that the most efficient producers continue to produce.”
It remains to be seen if the Trump administration will side with Exxon and let the “free market” sort things out by letting dozens of shale companies go bankrupt, or if the U.S. government will intervene in one way or another to prop up unprofitable shale drilling.
For now, aside from a substantial cut in spending, Exxon is staying the course, despite its own problems living beyond its means.