The Humbling of Exxon

twenty years. It's really mind boggling. And what's interesting, though, Jason, is that the coronavirus has ultimately laid bare a decade's worth of miscalculations by the company, whether it's shale oil to Canadian oil sands and even a mega deal in Russia. I mean, Excen has spent so much money on projects then now it even has to borrow to cover its dividend payments. And when it comes to energy companies, as

an investor, you expect those dividend payments. Well, and the numbers they don't lie, Carol, Xon needs a break even price of sixty dollars a barrel for that's five dollars more than VP and ten dollars more than Shell and Chevron, and maybe you've noticed oil is way way cheaper than that right now. And for a little more perspective on Exxon, once the undisputed king of Wall Street, X on today is worth less than Home Depot, which Jason has less than half its revenue. Check out the cover story The

Humbling of Exxon. A decade of miscalculation turned a juggernaut into just another middling company. And that was before the pandemic, by Kevin Crowley and Brian Gruley. Darren Woods, chief executive officer of Exxon Mobile, was chipper as he bandied with industry analysts on January thirty one about his company's poor performance. The coronavirus had yet to spread far beyond China, but Woods had prepared to say a few words about it

if anyone asked. No one did. As for the lower earnings and sliding share price, Woods assured his conference call audience that things were under control. Oil prices languishing in the sixty dollar a barrel range weren't a problem but an opportunity. We know demand will continue to grow, driven by rising population, economic growth, and higher standards of living, Wood said, we believe strongly that investing in the trough

of this cycle has some real advantages. He went on to describe how Exxon would spend in excess of thirty billion dollars on exploration and other projects in more than any other Western oil company. While we would prefer higher prices and margins, he said, we don't want to waste the opportunity this low price environment provides. Over the next several weeks, COVID nineteen ravaged the oil industry by vaporizing global demand. Just as Russia and Saudi Arabia launched a

price war. Investors were stunned to see oil fall to an eighteen year low of twenty two dollars and seventy four cents of barrel at the end of March. An agreement aimed at cutting output and boosting prices failed to halt the slide, and on April twenty some oil contracts were trading for less than zerollers were paying buyers to take the crude. The fallout for producers large and small

has been devastating. You're seeing fragilities exposed, says Kenneth Medlock, the third Senior Director of the Center over Energy Studies at RICE, University's Baker Institute for Public Policy COVID nineteen

is doing things that nobody could have imagined. Perhaps no company has been humbled as profoundly by recent events as Exxon, the West's largest oil producer by market value and an industry paragon that sets the bar not just for itself but for its competitors, And the pandemic isn't primarily to blame. The culprit is just as much the company itself. The coronavirus has laid bare a decade's worth of miscalculations. XN missed the wild and lucrative early days of shale oil.

An adventure in the oil sands of Canada swallowed billions of dollars with little to show for it. Political tensions doomed a mega deal in Russia. Exson ended up spending so much on projects that it has to borrow to come for dividend payments. Over a ten year period, Exon stock has declined ten point eight percent on a total

return basis, which includes dividends. The company's major rivals all posted positive returns in that period, except for BP, which had the deepwater horizons built in the Gulf of Mexico In the wider s and P five hundred index has returned nearly two The oil business is all about how much you produce, how low you get your costs, and how well you capture resources for the future. Exon produces about four million barrels a day, essentially the same as

ten years ago, despite repeated vows to push the number higher. Meanwhile, the company's debt has risen from effectively zero to fifty billion dollars, and its profit last year was a bit more than half what it was a decade ago. Once the undisputed king of Wall Street, XN today is worth less than Home Depot, which has less than half the revenue. Former CEO Rex Tillerson oversaw that eventful span before leaving to become President Trump's Secretary of State. Under Tillerson, Woods

ran Exn's then successful refining business. The rangey, white haired graduate of Texas A and M University is known for his unfailing optimism and affability. Woods declined to be interviewed for this article. The size of the job he has now is difficult to overstate. In an unprecedented crisis, He's guiding what author Steve call in his book Private Empire Exxon Mobile and American power, called a corporate state within the American state, one of the most powerful businesses ever

produced by American capitalism. For four decades, Exxon has plowed ahead, eyes on the distant horizon, keeping its financial returns healthy, share price steady, and dividend rising through wars and recessions, Democratic administrations and Republican Now the world will see how well Exon can survive a pandemic and whether it has

what it takes to thrive in the aftermath. On January thirty, two thousand and nine, Exxon reported a profit of forty five point two billion dollars for two thousand and eight. At that time, the biggest annual profit ever recorded by a public U S company. Revenue was four hundred and twenty five billion dollars. The stock closed that day at seventy six dollars, and Exxon pumped more oil than any

OPEC member except Saudi Arabia and Iran. Tillerson had been CEO for three years, a gruff Texan who had risen through Exon's rough and tumble drilling and exploration businesses. He was about to make his biggest deal to date, the thirty one billion dollar acquisition of x t O Energy,

the largest independent U S producer of natural gas. The deal was bold, not just because of the price, but also because in buying x t O, Exxon was tacitly acknowledging that concerns over greenhouse gases would spur demand for cleaner gas. The purchase surprised some investors, who couldn't easily see how the company would make a return. This wasn't like Exxon, known for an iron discipline about cutting deals that offered clear, reliable payoffs. Tillerson told analysts, will probably

suffer in the near term. As we put it together, this is really about value creation. Over the next many years, x t o s expertise was in extracting gas from subterranean rock using newly developed fracturing techniques. But as Exxon assimilated the company, wildcatters such as Harold Ham of Continental Resources and Scott Sheffield of Pioneer Natural Resources were discovering

that fracking worked for oil. Too Soon, it became clear that the real riches in North Dakota and West Texas shale were in oil, because crude was rising in price while gas was plummeting. As the decade wore on the magnitude of oil accessible in US shale would make the country an energy superpower to rival OPEC. Yet it would

be years before Exon would embrace shale oil. I would be less than honest if I were to say to you we aw at all coming, because we did not quite, frankly, Tillerson said at event at the Council on Foreign Relations. Later in nine he told the Houston Industry Conference that he probably paid too much for XDO a rare Exxon maya culpa. Tillerson didn't respond to requests for comment for this article. Exxon wasn't the only energy giant to whiff early on in the oil shell boom. So did Chevron, Royal,

Dutch Shell, and BP. That's partly because the business was undergoing a fundamental change that the super majors weren't eager to accept. For decades, politicians and consumers were paranoid about running short of oil and gas. The biggest companies, led by Exxon, spent great sums exploring and drilling in evermore exotic and forbidding geographies seeking the next mother load. Shale changed the calculus. Nobody doubted anymore that there were oceans of oil in the ground, it was a matter of

getting it out as inexpensively as you hood. The Hams and Sheffields, fueled by cheap money from Wall Street, were driving down extraction costs and ramping up production in old American oil fields that the big boys had long ago abandoned. Some of them were a short drive from exn's Irving, Texas headquarters. Exxon, meanwhile, was taking chances on far away lands. Consider Western Canada, where Exon invested in the Curl Oil Sands project. If you believed the world was short of crude,

it sounded great. Millions and millions of barrels were waiting to be squeezed from Alberta sand, and Exxon had the technical prowess to plumb them. But upfront costs ran eighteen percent higher than expected, and in twenty fourteen, oil prices began a nearly two year swoon as OPEC flooded the world with oil in the hope of suffocating American shale drillers.

With crew dipping below forty dollars a barrel. Exn's hand was forced in early seventeen, after investing more than sixteen billion dollars, the company had to erase three point billion barrels from its listing of crude reserves, most of it from Alberta. The company couldn't control oil prices, of course, but the oil sands right off was nevertheless part of the deepest reserves cut in Exn's modern history. Exon last year rebooked some of the Alberta reserves. Russia seemed more

of a sure thing. President Vladimir Putin and Tillerson had a history. In two thousand three, under then CEO Lee Raymond, Exxon had come close to buying into Ukos Oil, the Russian oil producer owned by putin adversary Mikhail Hrodrokowski. Putent balked at the prospect of Exon calling the shots on production and other matters. Tillerson, then an Exon senior vice president,

was just as wary of Putin meddling with Yukos. He helped persuade Raymond to back off, which forged a bond between Putin and Tillerson that no other Western oil company executive enjoyed. In eleven, Putin and Tillerson agreed on the first piece of what was envisioned as a three d billion dollar exploration to that opened vast tracks of the Russian Arctic thought to contain billions of barrels of oil. It was an ideal match. Exon wanted the natural resources, putin,

the expertise, and money. Then in fourteen, the Obama administration imposed sanctions on Russia for its annexation of Crimea. The sanctions prevented Exxon from continuing work on most of the Russian project. Another big fish had gotten away again. Exxon probably couldn't have predicted Crimea, nor was it alone in seeking access to Russian crude, but maybe that's what you get for trusting putin. By the time Tillerson departed to join the Trump administration, Exon looked a lot different than

it did when it reported those record earnings. Revenue and profit were a fraction of what they'd been, and the stock had lost its premium to other SMPI Index energy companies for the first time since worse for the first time since the Great Depression. Standard and Poor's had stripped Exon of its top credit rating, and the company faced a New York state lawsuit alleging that it had intentionally misled investors about the dangers of climate change. The company

won the case in December twenty nineteen. When Woods became CEO in January twenty seventeen, there were the predictable media stories about him stepping out of Tillerson's shadow. That wasn't going to be easy, given the big right off, the S and P downgrade, and the other unfortunate circumstances he inherited. But Woods was determined to rebuild Exxon with projects in Brazil, Guiana, Mozambique, and Papua New Guinea, the sorts of efforts that for

some shareholders conjured unpleasant memories of Canada and Russia. Exxon had also finally jumped into shale oil with a six billion dollar acquisition of acreage negotiated by Tillerson in West Texas's prodigious Permian basin. Other super majors weren't as eager to embark on new endeavors like Exxon. They'd spent heavily then paid for it. During the twenty fourteen twenty sixteen crash, Burned investors were cooling on energy stocks and diverting their

money into tech, pharma and other sectors. Energy now makes up less than three percent of the SMP five hundred, compared with more than ten percent In two thousand nine, the growing movement to transition away from fossil fuels to solar, wind and other energy sources was also peeling away investment, such as the clamor in Europe that Royal, Dutch Shell and BP have both pledged to become carbon neutral by

twenty fifty and invest heavily in renewable energy sources. Exxon has made no such pledge, instead investing in early stage green technologies, while insisting that the world will need more and more oil and gas until at least twenty forty, driven by China and India. Some on wall streets he demand peaking as early as twenty thirty. At his first annual investor Day in March seventeen, Wood's vowed to spend more on new ventures so Exxon would be ready when

the market turned. We are confident, he declared before dozens of analysts and shareholders in New York. Our job is to compete and succeed in any market, irrespective of conditions or price. Even then, a lot of institutional investors were inclined to take an ex and CEO's word as gospel. But an odd turning point came a year into Woods's tenure. Wall Street analysts threw a little tantrum about the lack

of forward looking data in Exn's quarterly reports. They were growing weary of sunny promises belied by a lackluster share price. With the company planning to spend so much money on stuff its rival saw a little need for the Analysts zeroed in on why Exon CEO never appeared on quarterly conference calls to answer their questions as the top bosses

at almost every other SMP five company. Did we think times have changed and that Exxon may not necessarily be able to expect the market will continue to offer it the benefit of the doubt, a Barclay's analyst wrote in a February investor note. In other words, Exxon was no

longer a special case. Two months later, Jeff woodbur then Exxon's investor relations vice president, promised that Woods would soon start participating in conference calls, saying, we believe that the investment community did not have a very good understanding of what our value growth potential was. Good morning, everyone, Wood said. When he stepped on stage at Exon's most recent investor day on March five in New York, he waited for

a response. When none came, he said, good morning everyone, Still nothing, come on now, Wood said, a little bit of energy here. Nervous titters rippled through the audience. On that Thursday, the coronavirus had only begun to wreak havoc with America's health and economic well being. Social distancing wasn't yet happening widely, though. Guests that the Exxon presentation were

offered small bottles of hand sanitizer. Woods mentioned the virus as part of a very challenging short term margin environment facing XN. It was a new twist on a familiar speel. Investors could have heard Tillerson spending years before the longer term horizon is clear, and today our focus is on that horizon. Wood said Exxon was, for the most part,

sticking with its plan. Wood said he intended to pair spending barely six percent to a maximum of thirty three billion dollars for the year, and emphasized the company's optionality, a word he uses a lot to adjust spending to react to market conditions while others retrench. Wood said, we believe the best time to invest in these businesses is during a low, which will lead to greater value capture.

In the coming up swing. You can do that if you have the opportunities and the financial capacity, which we do. This is a key competitive advantage of ours. Within forty eight hours, Woods plan was in trouble. The Russians and Saudi's unable to agree on how much crew to pump, started pushing oil prices down. At the same time, demand was spiraling lower as lockdowns proliferated around the world. Storage tanks and pipelines were overwhelmed with unwanted oil. Refineries reduced

their inflows of raw crude. High cost wells were shut. Analyst Paul Sankey of Missouo Securities USA observed in an investor note that Exson was stepping up when the industry was stepping back. Turns out they were stepping off a cliff. On March six, SMP again downgraded xn's credit rating to A A from a A plus and said it could happen again if the company does not take adequate steps to improve cash flows and leverage. A week later, the stock closed at thirty one forty five cents, the lowest

since two thousand two. Investors started to wonder whether Exon might end its string of thirty seven straight yearly increases in its dividend. To cover that fourteen point seven billion dollar payment, the third highest among SMP five companies. Along with its aggressive capital spending, Exon needed crude to fetch about seventy seven dollars a barrel, the highest break even among oil majors, according to our BC Capital Markets. The stock began to recover in early April, but it was

all too much. On April seven, Would said Exxon would cut capital spending to twenty three billion dollars a drop of an additional ten billion dollars or thirty and shave operating expenses by the bulk of the cuts would be aimed at the Permian. Exxon would defer some activities in its Guiana project while postponing investment decisions elsewhere. They cried Uncle, says Rice University's Medlock. With the cuts, the break even dropped to sixty dollars a barrel, still tops among the

biggest companies. You could almost feel Woods gritting his teeth in the company's statement that day. The long term fundamentals that underpinned the company's business plans have not changed. Population and energy demand will grow, and the economy will rebound. Despite the cuts, Exxon still expected Permian production would rise. In other words, the company wasn't abandoning its strategy, it

was just hit pause in deference to COVID nineteen. Woods certainly can't be faulted for not foreseeing the recent oil carnage, with the industry abandoning fracking and laying off more than fifty thousand workers in March alone, and Exxon isn't seeking government intervention to help save you as shale oil as ham Sheffield and others are. With as many as one in three shale players expected to exit the market one way or another, Exxon could be in a position to

snap up cheap acreage after the virus retreats. The large companies might actually get bigger on the back of this, Medlock says. For now, though, it's hard not to see Exxon as just another company getting tossed around by the market. After the recent investor day, a reporter asked Woods of Exon was still capable of navigating today's up and down

and down some more energy business. I don't think you stay in business for one thirty five years, Wood said, without being attentive to the needs of your customers, your stakeholders, and the communities that you operate in. It wasn't actually an answer.