ExxonMobil declared an annual financial loss Tuesday for the first time ever, capping a year in which it had to borrow money and sell off assets to manage a US$15.2-billion payout to its shareholders.
“Exxon now faces growing challenges from frustrated investors, who are pressuring the company to shake up its board and change its strategy, arguing that the company needs to shift its business model to thrive in a rapidly evolving energy market,” the Institute for Energy Economics and Financial Analysis reports.
Exxon cut its capital investment on exploration and development projects by about 29% last year, IEEFA says, but still spent $2.6 billion more on that activity than it could recover from operations. “While these results were disappointing to some, they were not actually outliers,” adds analyst Clark Williams-Derry. “ExxonMobil has paid more to shareholders than it generated in free cash flows for 12 of the last 15 years. And its free cash flows have generally trended downwards for more than a decade.”
The latter half of 2020 was not kind to the fossil behemoth that famously predicted four years ago that oil, natural gas, and coal would still supply 77% of the world’s energy needs in 2040, with wind, solar, and biofuels providing just 4%.
The continuing dose of reality the industry faced last year prompted Exxon to rip up its $30-billion development plan in August, write off $20 billion in stranded assets toward the end of the year, fire 14,000 staff in November while claiming the fossil industry’s business fundamentals were still strong, and face fierce pushback for a vague attempt at a climate plan that made no commitment to actual emission reductions.
On the contrary, Exxon projected a 17% greenhouse gas emissions increase over the next five years, before disclosing last month that Scope 3 emissions pushed its total carbon pollution to 730 million tonnes in 2019.
“Exxon plans to up its production by one million barrels per day over the next five years,” Andrew Grant, Carbon Tracker’s head of oil, gas, and mining research, told Grist in December, after the company released its climate plan. “Reducing a minority of its life cycle emissions by a small sliver is the thinnest of fig leaves for a big increase in overall emissions and a bet on continued business as usual.”
Meanwhile, Exxon was unceremoniously dropped from the benchmark S&P 500 stock index last August, then put on notice by the Standard & Poors ratings agency last week that it could soon face a ratings downgrade, primarily due to competition from renewables.
Exxon’s performance had IEEFA warning a couple of weeks ago that the company will have to change direction in order to thrive. “By virtually every measure, the global oil and gas industry had a dreadful 2020,” wrote Williams-Derry and Director of Financial Analysis Tom Sanzillo. “But for ExxonMobil, this was simply the continuation of a trend.
During the tenure of CEO Darren Woods, the company’s stock has fallen faster and further than other oil and gas majors, destroying tens of billions of dollars of shareholder value.”
For most of the fossil industry, “last year’s torrent of bad news has now eased a bit,” Sanzillo and Williams-Derry added. “The industry is by no means thriving, yet rising oil prices should prevent a repeat of last year’s abysmal performance.”
But with a number of other colossal fossils at least trying to envision a transition off oil and gas, the two authors say Exxon looks likely to keep fighting the trend.
“Based on recent statements, ExxonMobil’s corporate leaders will likely treat this upturn as a vindication of their business strategy,” they write. “For decades, that strategy has hinged on a singular view of oil’s trajectory in the global economy: Consumption would rise in lockstep with economic growth. Pinched by rising demand and limited supplies, prices would rise—and companies able to discover and develop oil and gas reserves would eventually generate ample returns.”
None of which amounts to sound analysis, after a decade that “proved that this view of oil markets is outdated. Economic growth now requires less oil. Reserves have grown more abundant. Prices have trended downward. A host of competitors and external forces—including ever-cheaper renewables, rising efficiency, plastics recycling, preference for clean energy, growing cooperation on Paris Agreement goals, and a sophisticated global climate movement—are realigning energy markets by eroding oil and gas demand. Combined, these forces undermine both growth assumptions and long-term profits for the oil and gas sector.”
IEEFA has more on the fierce headwinds Exxon will face if it tries to sustain the assumptions and practices that brought it to this week’s financial statement.
On Sunday, meanwhile, The Wall Street Journal reported that Woods and his counterpart at Chevron, Mike Wirth, opened negotiations early last year to explore the possibility of merging their companies. While the talks were eventually called off, “such consequential discussions are indicative of the pressure the energy sector’s most dominant companies faced as COVID-19 took hold and crude prices plunged,” The Guardian says. The talks “were serious enough for legal documents involving certain aspects of the merger discussions to be drafted, one of the sources told Reuters.”
With market capitalization of $190 billion for Exxon and $164 billion for Chevron, “such a deal would reunite the two largest descendants of John D Rockefeller’s Standard Oil monopoly, which was broken up by U.S. regulators in 1911, and reshape the oil industry,” The Guardian adds, citing the Journal.
At a glance, the two companies have a lot in common. They were both cited in last week’s Standard & Poors notice about a possible ratings upgrade, and they’re similarly dismissive about the transition to carbon-free energy. And Wirth “tried to push back on the doom and gloom during an earnings call Friday,” Politico Morning Energy reported yesterday, saying Chevron “would not make large investments in renewable energy production because it wasn’t the company’s area of expertise—instead it would focus on carbon capture technology,” just like Exxon.