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Exxon Is Now the Thing It Wasn't Supposed to Be

Bloomberg logoBloomberg 12/1/2020 Liam Denning

(Bloomberg Opinion) -- Exxon Mobil Corp. is about to lose perhaps $20 billion from its books. But it has lost something worth maybe 10 times that amount: its reputation.

Exxon used to occupy the penthouse in that ivory edifice known as Supermajor Towers. Its neighbors shared this rarefied space but got off the elevator many floors below.

chart: Floored © Bloomberg Floored

Today, Exxon trades at a 16% discount to its peers on price to book. All else equal, if it still enjoyed its historic premium — 92% on average in the five years leading up to 2016 — it would be worth roughly $200 billion more than it is. 

Exxon’s historic premium rested on a reputation for being the smartest oil major in the room. Smart at executing big, complex projects. Smart at being disciplined with its capital and making strategic bets. The operational reputation remains intact. It is the reputation for the latter that has crumbled.

The upcoming $17 billion to $20 billion write-down of natural gas assets closes a chapter that began almost exactly 11 years ago with the announcement of a $41 billion offer for shale-gas driller XTO Energy Inc. The subsequent collapse of natural gas prices made guessing the timing of an eventual impairment something of a parlor game in industry circles. The only surprise is that it took so long.

Two decades ago, Exxon had just closed the deal that created its modern incarnation, the $80 billion takeover of Mobil Corp. It was a masterstroke, both of timing — just before the supercycle kicked in — and in gaining choice assets such as Qatar’s liquefied natural gas riches.

But Exxon has since made several major missteps. Before XTO, it was wrongfooted by the turnaround in the U.S. gas sector, investing in import capacity that had to be switched to export instead. It made a big bet on Russia that was then hamstrung by sanctions after the annexation of Crimea — hardly Exxon’s fault, but a big blow to development plans nonetheless. Meanwhile, a foray into Iraq was long on barrels but short on margins, and Exxon may be about to withdraw altogether from there, too.

Along the way, Exxon’s reputation for discipline has eroded alongside its return on capital, the metric it evangelized on Wall Street under former CEO Lee Raymond. This has become acute under current CEO Darren Woods, whose pre-Covid spending plans amounted to effectively replacing most of the major’s gargantuan fixed-asset base in the space of five years, and in the teeth of ongoing oil-price weakness and the looming threat of peak oil demand. It’s the sort of counter-intuitive strategy only companies with Exxon’s reputation could get away with. Except the collapse in the stock’s premium — and capitulation on the strategy earlier this year — show that it wasn’t getting away with it.

There is a parallel here with another American icon, General Electric Co. As a true conglomerate, GE’s valuation rested largely on the belief that its leadership could make (and execute) smarter bets than the market. A series of bad ones, not least in the energy business, eventually trashed that — along with the dividend. My colleague Brooke Sutherland counts at least $30 billion of GE write-downs linked to its energy investments in the past two years.

Exxon’s dividend remains intact; with buybacks and blockbuster budgets having been ditched already, that roughly $15 billion annual payout represents the last redoubt. Further cuts to spending, also announced Monday, are designed to defend it. Still, the wording on Exxon’s press release about “working to maintain a reliable dividend” carries a discomfiting note of ambivalence for this company.

Indeed, this captures the essence of the problem. Exxon has been selling assets or borrowing to cover its dividend for a couple of years already. Net debt-to-capital has climbed from about 15% to almost 25% in that time (the write-down could take it about 27%). By taking on such leverage, Exxon has slowly but surely turned its stock into the very thing the supermajors are not supposed to be: an oil-price play. It’s the sort of risky equity story that can be found all too easily across this sector. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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