Bloomberg Businessweek - USA (2020-05-04)

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Bloomberg Businessweek May 4, 2020

DarrenWoods,chiefexecutiveofficerofExxonMobilCorp.,

waschipperashebandiedwithindustryanalystsonJan. 31

abouthiscompany’spoor 2019 performance.Thecorona­

virushadyettospreadfarbeyondChina,butWoodshadpre­

paredtosaya fewwordsaboutit if anyoneasked.Noonedid.

Asforthelowerearningsandslidingshareprice,Woods

assuredhisconference­callaudiencethatthingswereunder

control.Oilpriceslanguishinginthe$60­a­barrelrange

weren’ta problembutanopportunity.“Weknowdemand

willcontinuetogrow,drivenbyrisingpopulation,economic

growth,andhigherstandardsofliving,”Woodssaid.“We

believestronglythatinvestinginthetroughofthiscyclehas

somerealadvantages.”HewentontodescribehowExxon

wouldspendinexcessof$30billiononexplorationandother

projectsin2020,morethananyotherWesternoilcompany.

“Whilewewouldpreferhigherpricesandmargins,”hesaid,

“wedon’twanttowastetheopportunitythislow­priceenvi­

ronmentprovides.”

Overthenextseveralweeks,Covid­ 19 ravagedtheoil

industrybyvaporizingglobaldemandjustasRussiaandSaudi

Arabialauncheda pricewar.Investorswerestunnedtosee

oilfalltoan 18 ­year­lowof$22.74a barrelattheendofMarch.

Anagreementaimedatcuttingoutputandboostingprices

failedtohalttheslide,andonApril 20 someoilcontracts

weretradingforlessthanzero—sellerswerepayingbuyers

totakethecrude.Thefalloutforproducerslargeandsmall

hasbeendevastating.“You’reseeingfragilitiesexposed,”says

KennethMedlockIII,seniordirectoroftheCenterforEnergy

StudiesatRiceUniversity’sBakerInstituteforPublicPolicy.

“Covid­ 19 is doingthingsthatnobodycouldhaveimagined.”

Perhapsnocompanyhasbeenhumbledasprofoundly

byrecenteventsasExxon,theWest’slargestoilproducer

bymarketvalueandanindustryparagonthatsetsthebar

notjustforitselfbutforitscompetitors.Andthepandemic

isn’tprimarilytoblame;theculpritisjustasmuchthe

companyitself.

Thecoronavirushaslaidbarea decade’sworthofmiscal­

culations.Exxonmissedthewildandlucrativeearlydaysof

shaleoil.AnadventureintheoilsandsofCanadaswallowed

billionsofdollarswithlittletoshowforit.Politicaltensions

doomeda megadealinRussia.Exxonendedupspendingso

muchonprojectsthatit hastoborrowtocoverdividendpay­

ments.Overa 10­yearperiod,itsstockhasdeclined10.8%on

a total­return basis, which includes dividends. The compa­

ny’s major rivals all posted positive returns in that period,

except for BP Plc, which had the Deepwater Horizon spill

in the Gulf of Mexico in 2010. The wider S&P 500 index has

returned nearly 200%.

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. Exxon produces about 4 million barrels a day—

essentially the same as 10 years ago, despite repeated vows

to push the number higher. Meanwhile, the company’s debt

has risen from effectively zero to $50 billion, and its profit last

year was a bit more than half what it was a decade ago. Once

the undisputed king of Wall Street, Exxon today is worth less

than Home Depot Inc., which has less than half the revenue.

FormerCEORexTillersonoversawthateventfulspanbefore

leavingtobecomePresidentTrump’ssecretaryofstate.Under

Tillerson,WoodsranExxon’sthen­successfulrefiningbusiness.

Therangy,white­haired graduate of Texas A&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 cri­

sis he’s guiding what author Steve Coll, in his book Private

Empire: ExxonMobil 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 reces­

sions, Democratic administrations and Republican. Now the

world will see how well Exxon can survive a pandemic—and

whetherit haswhatit takestothriveintheaftermath.

On Jan. 30, 2009, Exxon reported a profit of $45.2 billion
for 2008, at that time the biggest annual profit ever recorded
by a public U.S. company. Revenue was $425 billion, the stock
closed that day at $76, and Exxon pumped more oil than any
OPECmemberexceptSaudiArabiaandIran.
TillersonhadbeenCEOforthreeyears.A gruffTexan
who’drisenthroughExxon’srough­and­tumble drilling
and exploration businesses, he was about to make his big­
gest deal to date: the $31 billion acquisition of XTO Energy
Inc., the largest independent U.S. producer of natural gas.
The deal was bold not just because of the price, but also
because in buying XTO, 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, “We’ll probably suffer in the near term as we
put it together. This is really about value creation over the
next many years.”
XTO’s expertise was in extracting gas from subterranean
rock using newly developed fracturing techniques. But as
Exxon assimilated the company, wildcatters such as Harold
Hamm of Continental Resources Inc. and Scott Sheffield of
Pioneer Natural Resources Co. 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
U.S. shale would make the country an energy superpower
to rival OPEC. Yet it would be years before Exxon would
embrace shale oil. “I would be less than honest if I were
to say to you ... we saw it all coming, becausewedidnot,
quite frankly,” Tillerson said at a 2012 event at theCouncilon
DATA: COMPILED BY BLOOMBERG Foreign Relations. Later, in 2019, he told a Houstonindustry