By: Jonás Spellman
For decades, ExxonMobil was an unstoppable machine. He made loads of money, invested it wisely, and rewarded his shareholders handsomely. As recently as 2014, Exxon was the most valuable company on the planet. Its market value exceeded 446,000 million dollars in the middle of that year, in circumstances in which crude oil prices were trading above 100 dollars a barrel.
But Exxon today is a shadow of its former self. A series of strategic decisions failed, from betting on natural gas at the top of the market to being late to the US shale boom. Exxon is now losing money for the first time in decades, and its long record of raising and paying dividends is in serious question. The company is an emblematic example of the fossil fuel industry at a time of deep concern about the climate crisis. And its market value has collapsed by a staggering $267 billion since the peak.
Exit of the Dow Jones.-
The latest humiliation for Exxon is that it has been kicked out of the Dow Jones Industrial Average, the exclusive index it was a part of for 92 years, and is being replaced by a technology company, Salesforce CRM. Chevron is now the only oil company in the Dow.
“It’s pretty symbolic,” said Stewart Glickman, an energy analyst at CFRA Research. “It’s an acknowledgment that the energy sector no longer has the same influence it used to.” The energy sector comprised 16% of the S&P 500 in 2008, when oil prices rose above $140 a barrel, according to Bespoke Investment Group. Today, the energy industry makes up just 2.5% of the S&P 500. That change reflects the transformation of the US economy in favor of technology, and also the market’s push in that direction. It’s no secret that many tech companies, including Amazon, Apple, and Zoom, have prospered tremendously during the pandemic. Instead, oil companies have been crushed by crashing prices and collapsing demand.
Bad bet on natural gas and late on shale.-
But the main lessons of the Exxon debacle are, in my opinion, a bad reading of the future energy market and a bad timing in its investment and divestment decisions.
In 2009 Exxon spent 41 billion dollars to buy the natural gas giant XTO Energy. That deal proved terribly ill-timed because natural gas prices plummeted shortly afterward and never recovered. And instead, it failed to capitalize on the epic oil boom that took place on its home court, in the Permian Basin of Texas, while dabbling in expensive deepwater drilling projects in Russia and in the oil sands of Canada, neither of which which worked.
The good news is that some of Exxon’s gambles abroad are finally paying off. Its investments in Guyana could prove lucrative, as the region is expected to become a major source of growth for the company in the future. Exxon estimates that there are more than 8 billion barrels of recoverable oil in Guyana. But it will take time and money to turn those barrels into revenue.
More lessons: slow to turn the wheel towards renewable energies.-
However, even if Guyana turns out to be a victory, the company faces an uphill battle due to the climate crisis. Exxon is the best-known company in the fossil fuel industry in the world at a time when investors prefer to bet on solar and wind energy. Although European oil companies, including BP and Total, have aggressively invested in renewable energy and set bold emissions reduction targets, Exxon’s efforts have been much more timid.
Even the most pessimistic analysts are not predicting that oil demand will disappear overnight. But a gradual shift away from crude, already a global reality, means only the best-run oil companies will prosper. And for the last decade at least, Exxon has clearly not been an example of that.
Sources:
(1) CNN Business Perspectives, Matt Egan, Aug 2020
(2) The Wall Street Journal, Exxon’s Departure From Dow Highlights Market’s Retreat From Energy Bets, Aug 2020