(Bloomberg) – Exxon Mobil Corp. is breaking its debt-driven $ 30 billion a year plan to rebuild an aging global portfolio after cash flow evaporated and threatened the company’s precious dividend.
The move by the western world’s leading oil explorer represents a radical change after more than two years of doing more or less the opposite of its main rivals, who have been shrinking and looking to a future beyond fossil fuels. As recently as March, the Texas giant had tied its future to large capital spending on oil and natural gas, at a time when its peers were exploring ways to decarbonize.
Exxon’s CEO Darren Woods’ plan was to lean on the company’s impeccable balance sheet to drill for jets and still cover nearly $ 15 billion in annual dividends. If cash flow fell short, Exxon’s stellar credit rating would allow it to borrow to get through the shortage times, or so he thought.
But the black swan event of a global pandemic that crushed energy demand amid stubborn excess oil surpassed Woods’ ambitions. Cash flow from operations fell to zero in the second quarter, Exxon reported Friday, and one of Woods’ top lieutenants announced that all bets were canceled.
The company is seeking budget cuts of “significant potential” and, as a result, some managers may be out of a job, senior vice president Neil Chapman said during a conference call with analysts.
Those cuts would add to ongoing efforts to cut its US workforce by as much as 10% and a $ 10 billion reduction in capital outlays announced in April.
More surprising was Chapman’s announcement that work on Exxon’s five major developments: deepwater oil in Guyana and Brazil, shale from the Permian basin, gas exports from Mozambique and Papua New Guinea, will be reduced or delayed.
Still, he rejected any suggestion that Exxon was undertaking a strategic change. Rather, Exxon is prioritizing dividend coverage and protecting its balance sheet, said Chapman, one of three senior executives who serve with Woods on the management committee that oversees day-to-day operations.
“I don’t think it’s a fundamental change,” said Chapman. “I think it is a response to the short-term environment.”
Exxon is very sensitive to the fate of its dividend because 70% of the company’s shareholders are retail investors, he said. Keeping that payment to shareholders is “something we take very, very seriously.”
The commitment has a significant cost. Exxon already cut its capital spending plan by about a third, to around $ 23 billion three months ago, when the pandemic panicked the world’s leading economies. Next year’s disbursements are likely to drop to $ 19 billion, Chapman said.
Although it is an important change for management, the reduced outlook may appease investors. The countercyclical growth strategy was never embraced by the market, and stocks fell to a 15-year low even before the virus hit. Exxon had fallen out of the top 10 companies on the S&P 500 for the first time in 2019 and lost its premium valuation on its peers a year earlier.
However, without spending so much money on new projects, questions remain about how Exxon can mitigate its long-term production downturns and how resilient its assets will be in an energy transition to low-carbon fuels.
Rivals Chevron Corp., Royal Dutch Shell Plc and BP Plc depreciated billions of dollars in assets in the last quarter due to the depressed price outlook. Exxon, famous for its resistance to redemptions, did not take on such charges.
The company is currently undergoing its “very rigorous” annual asset value review process and is due to present the results to the board in November, Chapman said. While Exxon does not publish price forecasts, unlike its European peers, Chapman said they are “consistent with the range of third-party estimates.”
Exxon fell 0.9% to $ 41.47 at 1:19 p.m. in New York, giving it a market value of $ 175 billion. That’s almost $ 100 billion less than electric car maker Tesla Inc.
Original Note: Exxon Tears Up Growth Plan in Attempt to Defend Its Dividend
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