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20 February 2020

All-points-south for ExxonMobil, on verge of collapse

It’s been three weeks since ExxonMobil released its results for Q4 2019, which showed a plethora of warning signs to investors. Its stock hasn’t stopped falling since – sliding to its lowest level since July 2010. Some will see this as a prime time to buy, and that the company that used to be the most valuable in the US can’t just crumble. But with the rise of green financing and renewables, the slide of ExxonMobil’s fall from grace may only just be getting started.

In 2008, ExxonMobil was the largest company in the US – it’s now 9th, but this isn’t just due to the rise of tech giants like Apple and Microsoft. Since peaking in value in 2014, the company has seen a decrease in oil production, despite levels growing globally. In 2019, a production level of 3,952 million barrels of oil equivalent sits below 2006 levels of 4,237, despite Capex costs increasing by 35% in this timeframe. The shift to natural gas is also meaning that ExxonMobil’s margins are being squeezed, with oil prices sitting higher than those for gas. Due to this, the company’s operating cash flow is now 40% less than it was in 2006, now at under $30 billion.

With pockets squeezed, Exxon has had to throw everything at keeping investors on board – increasing dividends from $1.28 to $3.48 per share – with yield rising to 5.7%, despite the company’s lack of available funds. This has led to debt, and lots of it. Since 2006, when the company sat firmly at $26.1 billion in the green, the company has accrued a record net debt of $43.8 billion.

With capital expenditure plans of $30 billion for 2020, Capex will dominate the operating cash flow, and Exxon will have to fork out another $15 billion from debt finance to fund its dividends next year – which it can’t now scrap for fear of further abandonment. Some of this funding will also come from the selling of $25 billion worth of assets through 2025, although this has previously been earmarked for a handful of ‘mega-projects’ in Guyana, Mozambique, Papua New Guinea, Brazil and the US.

This will be just one of the issues causing a stir at ExxonMobil. Renewables are starting to take preference over fossil fuels in large parts of the US, with record low prices for both wind and solar as one of the drivers behind the lower spot prices for oil and gas. With the cost of renewables falling more rapidly, margins will be tightened within oil and gas, before even considering the impact of carbon taxes which will soon be introduced to European markets and eventually making their way over to the US.

Pressure is also coming from large scale investors. The top two owners of ExxonMobil are the Vanguard Group and BlackRock, who together control around 15% of the company’s shares. The pair put early pressure on the company in 2017, forcing Exxon Mobil to produce a climate change report. With BlackRock rebranding itself as a ‘green financer’ after joining the Climate Action 100+ in January this year, the bank will have to reduce its engagement with Exxon, where share prices will suffer. Vanguard has been slightly slower to the party but could well follow suit in the near future, putting more pressure on ExxonMobil to go green.

Exxon has shown little sign of changing so far, currently only targeting a 10% reduction in emissions between 2016 and 2023. Reports have highlighted that as much as 90% of the company’s planned spending over the next 11 years fails to comply with the IEA’s 1.6-degree Celsius pathway. With business as usual, the company is set to have the largest share of the $900 billion in stranded energy assets as fossil fuels become redundant through the green transition.

The company is also facing an increasing backlash in the public eye, amid several lawsuits in the US, for misleading investors about the risks associated with tackling climate change. Despite a recent victory in a $1.6 billion lawsuit in New York, several other cases are underway in states like Massachusetts.

The basis of this legal pressure is largely derived from ExxonMobil’s history of climate denial. A 2017 study from Harvard University analyzed 187 climate change communications from the company up to 2014 and exposed that “as documents become more publicly accessible, they increasingly communicate doubt” around the human influence on climate change.

The paper indicates that 80% of internal documents acknowledge that climate change is both real and human caused, where 81% of advertorial documents express doubt around the subject. According to a collaborative study entitled ‘America Misled’, “The strategy, tactics, infrastructure, and rhetorical arguments and techniques used by fossil fuel interests to challenge the scientific evidence of climate change — including cherry picking fake experts and conspiracy theories.”

The way we see this playing out is by BlackRock slowly divesting from ExxonMobil. With public pressure building, Vanguard will be forced into reforming its criteria for investment, and brokers will start looking to renewables companies like Orsted or Enel as a safer place for investors’ money. This may happen slowly at first, but if ExxonMobil have to keep selling off assets to increase its yield through dividends, then vague promises of ‘mega projects’ wont got far in keeping investors onboard. Similarly, if any of Exxon’s legal cases gain traction, the process will only be accelerated.

If major shareholders jump ship, then CEO Darren Woods will be out of the door, with the board placing the blame at his feet. He’ll probably be replaced with another age-old Exxon veteran, who will do much the same, but at some point, Exxon will have to break this cycle for radical change – most likely when assets start to become stranded. As one of the largest oil companies, Exxon will experience this spiral harder than most, and will some fresh thinking to start on the trajectory of the likes of Equinor in shifting assets from fossil fuels to renewables, but the speed at which this is adopted will be key to the presence Exxon has in the future energy sector.