Bloomberg Businessweek - USA (2020-05-04)

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BloombergBusinessweek May 4, 2020

onstuffitsrivalssawlittleneedfor,theanalystszeroedin

onwhyExxon’sCEOneverappearedonquarterlyconfer­

encecallstoanswertheirquestions,asthetopbossesat

almosteveryotherS&P 500 companydid.“Wethinktimes

havechanged,andthatExxonmaynotnecessarilybeableto

expectthemarketwillcontinuetoofferit thebenefitofthe

doubt,”a BarclaysPlcanalystwroteina February 2018 inves­

tornote.Inotherwords,Exxonwasnolongera specialcase.

Twomonthslater,JeffWoodbury,thenExxon’sinvestor

relationsvicepresident,promisedthatWoodswouldsoon

startparticipatinginconferencecalls,saying,“Webelieve

thattheinvestmentcommunitydidnothavea verygood

understandingofwhatourvaluegrowthpotentialwas.”

“Goodmorning,everyone,”Woodssaidwhenhestepped

onstageatExxon’smostrecentInvestorDay,onMarch 5

inNewYork.Hewaitedfora response.Whennonecame,

hesaid,“Goodmorning,everyone?”Stillnothing.“Come

onnow,”Woodssaid.“Alittlebitofenergyhere.”Nervous

tittersrippledthroughtheaudience.

OnthatThursday,thecoronavirushadonlybegunto

wreakhavocwithAmerica’shealthandeconomicwell­

being.Socialdistancingwasn’tyethappeningwidely,though

guestsattheExxonpresentationwereofferedsmallbottles

ofhandsanitizer.Woodsmentionedthevirusaspartofa

“verychallengingshort­termmarginenvironment”facing

Exxonin2020.Itwasa newtwistona familiarspielthat

investorscouldhaveheardTillersonspinningyearsbefore.

“Thelonger­termhorizonis clear,andtodayourfocusis on

thathorizon,”Woodssaid.

Exxonwasforthemostpartstickingwithitsplan.Woods

saidheintendedtoparespendingbarely6%,toa maximum

of$33billionfortheyear,andemphasizedthecompany’s

“optionality”—a word he uses a lot—to adjust spending to

react to market conditions. While others retrench, Woods

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 upswing. You can do that if you have the oppor­

tunities and the financial capacity, which we do. This is a key

competitive advantage of ours.”

Within 48  hours, Woods’s plan was in trouble. The
Russians and Saudis, unable to agree on how much crude
to pump, started pushing oil prices down. At the same time,
demand was spiraling lower as lockdowns proliferated
aroundtheworld.Storagetanksandpipelineswereover­
whelmedwithunwantedoil;refineriesreducedtheirinflows
ofrawcrude;high­cost wells were shut. Analyst Paul Sankey
of Mizuho Securities USA observed in an investor note that
Exxon was “stepping up when the industry was stepping
back. Turns out, they were stepping off a cliff.”
On March 16, S&P again downgraded Exxon’s credit rat­
ing, to AA from AA+, 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 $31.45,
the lowest since 2002. Investors started to wonder whether
Exxonmightenditsstringof 37 straightyearlyincreasesin
itsdividend.Tocoverthat$14.7billionpayment—thethird­
highest among S&P 500 companies—along with its aggressive
capital spending, Exxon needed crude to fetch about $77 a
barrel, the highest breakeven among oil majors, according
to RBC Capital Markets.
The stock began to recover in early April, but it was all too
much. On April 7, Woods said Exxon would cut 2020 capital
spending to $23 billion—a drop of an additional $10 billion,
or 30%—and shave operating expenses by 15%. The bulk of
the cuts would be aimed at the Permian. Exxon would defer
some activities in its Guyana project while postponing invest­
ment decisions elsewhere. “They cried uncle,” says Rice
University’s Medlock. With the cuts, the breakeven dropped
to$60a barrel,stilltopsamongthebiggestcompanies.
YoucouldalmostfeelWoodsgrittinghisteethinthecom­
pany’sstatementthatday:“Thelong­term fundamentals that
underpin 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
productionwouldrise.Inotherwords,thecompanywasn’t
abandoningitsstrategy;it wasjusthittingpauseindefer­
encetoCovid­19.
Woods certainly can’t be faulted for not foreseeing the
recent oil carnage, with the industry abandoning fracking
and laying off more than 50,000 workers in March alone.
And Exxon isn’t seeking government intervention to help
save U.S. shale oil as Hamm, Sheffield, and others are. With
as many as 1 in 3 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 aroundbythemarket.Afterthe
recentInvestorDay,a reporteraskedWoodsif Exxonwasstill
capableofnavigatingtoday’sup­and­down­and­down­some­
more energy business. “I don’t think you stay in business for
135 years,” Woods said, “without being attentive to the needs
of your customers, your stakeholders, and the communities
*BREAKEVEN DEFINED AS OIL PRICE NEEDED TO COVER CAPITAL SPENDING AND DIVIDENDS. DATA: COMPILED BY BLOOMBERG that you operate in.” It wasn’t actually an answer.

2006 2019 1/2/20 4/27/20

60

$66

55

50

20

$68b

23

Brentcrudeoilprice

2020 breakeven prices*

Exxon’sgrossprofit

Exxon’s debt

Exxon

BP

Shell &

Chevron

The Numbers Tell the Story