By Alex Kimani
U.S. oil and gas supermajors have come under plenty of flak during the ongoing oil price rout, with some blaming them for the oil price collapse for stubbornly refusing to lower production while others have accused them of using backhand means to stifle smaller competitors. Specifically, Pioneer Natural Resource CEO Scott Sheffield is on record accusing ExxonMobil (NYSE:XOM) of blocking help from the American government in a bid to kill off smaller shale companies with weaker balance sheets.
And now, some pundits are claiming that Exxon itself is facing some pretty precarious prospects down the line if low energy prices persist.
Wood Mackenzie, a global energy, renewables, and mining research and consultancy group, has reported that Exxon is the least resilient of all the oil supermajors with the least ability to weather the market downturn.
WoodMac says this is the case thanks to Exxon’s huge exposure to low-margin assets that leaves it vulnerable to continued low energy prices.
WoodMac has tested the cash margins of the seven oil giants using capital expenditure on a unit of production and post-tax cash flow plus, assuming Brent prices remain in the $30 to $70 range through 2030.
The firm has concluded that Exxon has the least ability to weather a prolonged downturn, thanks to its exposure to 60% of the 30 lowest-margin assets owned by the supermajors. These include Kearl and Cold Lake (oil sands) in Canada that the firm has labeled a “huge drag” as well as Alaska’s Prudhoe Bay (mature onshore oil).
Interestingly, Exxon’s key rival, Chevron Corp. (NYSE:CVX), has emerged at the top of the pile closely followed by Royal Dutch Shell (NYSE:RDS.A), thanks to their robust deepwater projects and LNG as well as less exposure to high-cost assets. Chevron’s giant Australian LNG projects have played a big part in helping it cut costs.
These findings come off as quite surprising, given that quite a number of analysts had turned bullish on Exxon.
For instance, before disaster struck, Bank of America Merrill Lynch had predicted that 2020 could “finally be Exxon Mobil’s year“. BofA expected Exxon to become cash flow positive in 2020 and XOM and the stock to nearly double to $100. “The inflection in Permian production is well under way while the first oil from Guyana confirmed for December kick starts what we expect to be 7-8 years of growth…” they gushed.
Back in March, Rystad Energy via Reuters reported that only 16 U.S. shale companies were capable of making money at oil prices below $35 per barrel with the U.S. shale company average cost per barrel clocking in at ~$43.83. Rystad reckoned that Exxon was in good stead thanks to a break-even point of $26.90 per barrel at its New Mexico oilfields, representing about a quarter of its Permian output.
Unfortunately, it turns out that the rest of the company’s assets are nowhere near as cheap.
But maybe the writing was already on the wall. Last quarter, Exxon went on to post its first loss in a decade after booking a $640 million loss mainly due to what it termed “a $2.9B market-related charge”. Exxon was the last of the supermajors to curtail production, announcing in May that it was slashing $10 billion from its planned 2020 capex, good for a 30% budget cut. The company has now closed a crude distillation unit at its 502.5K bbl/day Baton Rouge refinery in Louisiana, citing low demand. Lately, Exxon has cut crude production at the Liza field in offshore Guyana due to problems with gas reinjection equipment. Production from the field has now plunged to 25K-30K bbl/day compared to the 120K bbl/day expected by June
Meanwhile, the sale of its North Sea assets has turned out less well-than-expected, forcing the company to slash its asking price from $2B to $1.5B.
Exxon has maintained its juicy dividend, though, with the forward yield of 7.38% among the highest in the industry. However, that has not stopped the shares from tanking along with the rest of the market, with XOM shares down 32.4% YTD compared to -24.3% return by CVX and -33.5% by XLE.
Despite these weaknesses, Exxon still has its strong points.
The company’s 0.27 debt-to-equity ratio is way lower than the industry median of 0.47, while its excellent A.A. credit rating means it remains relatively safe from the debt scourge afflicting the shale industry.
That said, Exxon’s high production costs compared to its peers has made it lose some of its shine, which is a big blow in these highly uncertain times. Indeed, CVX has become the new favorite of the group, though valuation concerns remain.
Downgrading CVX, RBC analyst Biraj Borkhatari has said, “Chevron has firmly positioned itself as the ‘safe haven’ in the sector, with a flexible capex profile coupled with a robust balance sheet standing out versus many peers. However, the current premium valuation, which is at multi-year highs, leaves limited room for further outperformance.”
Exxon’s weakness is mainly relative to its giant peers but is likely to remain a top sector pick mainly due to its ability to continue paying that dividend.