Markets Souring on Exxon Mobil

November 26, 2019

Institute for Energy Economics and Financial Analysis:

This week Moody’s changed ExxonMobil’s Triple-A rating from stable to negative, raising the prospect of the oil company being downgraded in 2020.

Moody’s has red-flagged ExxonMobil’s rising capital expenditures and weak revenues. The oil giant is challenged by a low price environment ($60/barrel) and diminished refining and chemical earnings. The problems for ExxonMobil’s business model are fundamental — revenues have eroded and rebounding oil prices are proving inadequate to fund operating expenses, capital plans and investor dividends.

Moody’s negative outlook is based on its assessment of recent actions by the company in light of current market conditions:

Rising capital expenditures are not producing increased revenues. Moody’s identifies negative cash flow for the company in 2019 and expects the same in 2020 and 2021.

Despite recent increases in capital expenditures compared to recent quarters, the company is still spending less than it did earlier in the decade. ExxonMobil’s lower capital spending could not keep pace with the more dramatic and negative impact of lower-for-longer oil prices.

Rising dividend payments to investors masks the fact that ExxonMobil’s total shareholder distributions, dividends and share buybacks, have been substantially reduced. Earlier this decade, shareholders received annual payments of $40 billion in total distributions, while dividend payments now amount to $16 billion annually and there are no share repurchases. Capital expenditure discipline and reductions in total payments to shareholders are not enough to keep the company on a sustainable financial path.

ExxonMobil anticipates selling assets through 2021 that will generate $15 billion in revenue, if successful. Moody’s anticipates higher debt levels for the company, even if it successfully executes its asset sale program.

Despite ExxonMobil’s efforts to reduce costs, Moody’s concludes: “The company’s high level of growth capital investments cannot be funded with operating cash flow and asset sales at projected levels given ExxonMobil’s dividend payout, absent meaningfully higher commodity prices and earnings from downstream and chemicals.”

These credit concerns are accompanied by a broader warning for ExxonMobil and other companies. “The negative outlook also reflects the emerging threat to oil and gas companies’ profitability and cash flow from growing efforts by many nations to mitigate the impacts of climate change through tax and regulatory policies that are intended to shift global demand towards other sources of energy and conservation.”

The cumulative impact of the risks identified by Moody’s adds up to a negative outlook for ExxonMobil. The financial factors considered by Moody’s reflect more than the current state of affairs. The analysis situates ExxonMobil’s present financial condition against the backdrop of recent business decisions. Over the past few months, the company has acknowledged that its attempt to pick up quick cash from the Permian Basin came up short. The company now sees the investment as a long-term proposition at a time when heavy capital investments and low earnings have undermined the company’s basic value proposition to investors.

Moody’s suggests that the company could experience a turnaround if it successfully executes its capital program, keeps a lid on rising debt levels, increases production growth and adds to its chemical and refining capacity.

We are skeptical of this formula. ExxonMobil has successfully executed on its plans to expand production levels in the Permian but, as Moody’s and ExxonMobil officials recently acknowledged, this has not improved its cash position and the longer term is increasingly uncertain. With lower-for-longer prices and a corporate decision to continue maximum drilling and exploration and rising dividend levels, debt levels are likely to rise. There is also reason to be concerned that ExxonMobil’s move to increase its refining and chemical capacity is taking place at a time when other large oil and gas players are doing the same. Oversupply and downward pressure on margins are quite likely.

20 Responses to “Markets Souring on Exxon Mobil”

  1. renewableguy Says:

    About 3 or 4 years ago, I showed a Bloomberg video showing what would happen when there were a million electric cars produced in the world. That would cause a glut in oil and reduce prices. I read somewhere there are now 3 million ev’s in the world and this might be part of the oil demand problem along with a slowing world economy.

    • jimbills Says:

      EVs will become an issue for oil demand, but there isn’t much impact yet. Oil demand growth, while sluggish, is still rising:
      https://www.cnbc.com/2019/11/15/iea-growth-in-global-oil-demand-more-than-doubled-in-the-third-quarter.html

      Most predict it to continue a slow rise into 2030, plus or minus a few years.

      A big issue with oil prices the last few years has been overproduction. The U.S. hit an all-time high in production last month:
      https://www.currentargus.com/story/news/local/2019/11/18/u-s-oil-production-reaches-12-8-million-barrels-per-day/4231024002/

      Rig count has been steadily dropping this past year, though, so that production is expected to level off in 2021. Oil prices at too low a level creates financial stress for the fracking industry. If oil prices rebound, the rig count would likely rebound.

      • jimbills Says:

        Therr were about 5.1 million EVs globally in 2018:
        https://www.iea.org/publications/reports/globalevoutlook2019/

        “Electric mobility continues to grow rapidly. In 2018, the global electric car fleet exceeded 5.1 million, up 2 million from the previous year and almost doubling the number of new electric car registrations.”

        Let’s say that 3 million additional EVs are sold globally in 2019. That’s still a drop in the bucket compared to total vehicle sales globally, which are estimated to be about 77 million in 2019:
        https://www.cnn.com/2019/11/26/economy/global-car-sales-manufacturing/index.html

      • J4Zonian Says:

        Too many people talk about 2030 as if we could actually choose to still be increasing EVs “slowly” then, and talk about 2040 as if we could still be doing the same by then if we don’t massively reduce emissions immediately. One more reason–besides all the obvious ones–that we have to do all this RFN is that by 2040 it’s very likely civilization will be in such chaos it will be too late to implement such solutions with any regularity or certainty.

        Because we already have a negative carbon budget, a need to build a flabbergasting amount of clean safe renewable infrastructure even with huge efforts in efficiency, and a need to first rid ourselves of corrupt, conservative, corporate, pseudo-religious government, we almost certainly can’t rely on private vehicles as we’ve been trying to—and thinking we could go on doing. Even if they’re EVs powered by clean safe renewable energy, we can’t afford them and don’t have time to build them and the infrastructure to run them. Bicycling, walking, and public mass transit are much more efficient in terms of the energy to both build and run the vehicles and supporting systems.

        • renewableguy Says:

          Because we already have a negative carbon budget,

          A negative carbon budget means we have co2 coming out of the sky being sequestered into the earth. If that is what you meant, then I don’t agree with your statement. We are clearly adding co2 to the atmosphere.

          Even if they’re EVs powered by clean safe renewable energy, we can’t afford them and don’t have time to build them and the infrastructure to run them.

          I picked up both electric cars used. First one was 6500 dollars and the Tesla model S used was $35000. Enough money down and the payments are affordable. I live with the white light at the end of the tunnel. And the light is getting closer in spite of president 45 and the fossil fuel lobby. Not reaching 1.5C or 2.0C in time is a real consequence. What ever happens we will adapt and mitigate.

          • J4Zonian Says:

            While “negative emissions” and other variations are common terms (as opposed to common terns) I’ve never heard “negative carbon budget” before and thought my meaning was clear. Let me clarify:

            “Carbon budget” is the amount of carbon, CO2, or CO2e in fossil fuels the world can still burn before passing some line, usually 1.5°C or 2°C over preindustrial temperature, or some other arbitrary cheating level—1995, 2005… Therefore, “we already have a negative carbon budget” means we have less than 0 to burn, meaning we’ve already guaranteed passing both 1.5 and 2°. There are hopes of mechanical negative emissions that are pipe dreams; and hopes of biological negative emissions—planting forests, etc.—that are fading quickly in the face of fires and insect damage (although maybe it’s a race between insect extinction and forest extinction with some interesting interactions between the 2).

            Obviously I wasn’t talking about you affording EVs. I would have thought “and don’t have time to build them and the infrastructure to run them” would have provided a clue to that. Equally obviously, every EV on Earth can’t start out used. Honestly, that combination—tu quoque plus extreme strawpersoning plus cherry picking plus etc., may be one of the dumbest compound arguments I’ve ever read, and with all the climate-denying delayalist, spent fuel rod, inequality-denier, and ARF (anti-renewable fanatic) arguments I’ve seen (some involving idiosyncratic reinterpretations of the laws of thermodynamics) that is really amazing. You’re better than that.

            Mass transit is more efficient in terms of energy, materials, land, infrastructure, time, and more. and it will be necessary to prioritize it everywhere to reduce emissions fast enough.

            As has been said about that light at the end of the tunnel, it may turn out to be an oncoming train. No, we will not necessarily adapt and mitigate enough for civilization and/or humanity to survive. We need to act now in wise and radical ways.

    • jimbills Says:

      Right. Peak oil demand in that is guessed at being around 2027, with first effects felt in 2023. That’s with a pretty high sales rate of EVs, though – about 5 million EVs sold in 2020.

      Even that is predicting just 50% EVs in 2040 – which is close to what I’ve seen elsewhere. With a rough doubling in the global vehicle fleet to that time, though, that leaves roughly the same number of ICE vehicles on the road then as there are today.

      • renewableguy Says:

        As ev prices equal that of the gas cars, we will see what happens. The S curve will throw off balance the oil market. Cost of bringing oil in will increase and the cost of owning an electric will decrease. We will be out of the Trump administration soon, (I hope) and this will accelerate some more.

        • jimbills Says:

          Yes, hope. My hopeful wish is that humans could somehow learn how to see reality without either optimist- or pessimist-tinted glasses. Just really look at the numbers coldly and analytically and decipher what that truly means for our future. We’d have a better guide for how to proceed IF we could do that.

          The thing about technology is that it doesn’t JUST work in favor of one market. It works in favor of the oil industry as well:
          https://www.ft.com/video/601c5056-302c-406d-8e91-eab7d33b2878

          Hydraulic fracturing was not a recently invented technology. People knew how to do it over a century ago. It’s just that new technologies allowed it to expand dramatically in the last two decades.

          EVs are not selling on the S-curve recently:
          https://cleantechnica.com/2019/01/20/forecast-2019-us-ev-sales-growth-will-drop-to-12/

          • renewableguy Says:

            IF we are to make this work, someone has to be out front pointing out the light at the end of tunnel and the other to keep it on track. There has to be the possibility of all that we can be out there. Thank you for all that you do.

          • jimbills Says:

            I recognize you don’t want to argue about this, and I don’t mean any ill will. The best to you.

            But, my question is – are we really seeing light at the end of the tunnel here? Or is that a mirage?

            With the above, even taking these estimates that EVs grow astoundingly quickly and on the S-curve, we’re not talking about significant decreases in carbon emissions to 2040. That could improve, but this will require more than we are currently doing in governmental incentives.

            The news recently about global emissions ties in here:
            https://www.usatoday.com/story/news/nation/2019/11/26/climate-emergency-u-n-report-urges-cuts-gas-emissions-immediately/4307991002/

            “The report says global emissions continue to rise and will need to be cut at a rate of 7.6% each year for the next decade to limit global warming to 2.7 degrees Fahrenheit, which is in line with the 2015 Paris Agreement.”

            That will not happen with our current course of EVs, renewables, signs that Exxon is struggling, etc. (Frankly, it’s crazy to think we’ll hit those emission reduction targets, but that’s another story.)

            I’m not saying massive EV growth and renewables growth shouldn’t happen, won’t happen, or are in any way bad. They’re great – they will reduce emissions far more than what we would do without them. The more the better, the faster the better.

            But, even with this, we’re looking at something like a 3 to 4 degree C temperature rise because of the economic growth that goes along with this. Under our current course, with the development of the EV and renewables and just watching the market do its thing, global emissions don’t drop until 2040 even under best cases. We’re also still talking about continued soil and aquifer depletion and species loss. If that’s the light at the end of the tunnel, then that’s it. I guess we could say that at least it’s not 5-6 degrees.

            But it’s also why I don’t take much comfort from these articles about the newest Tesla or Exxon struggling.

        • jimbills Says:

          “As ev prices equal that of the gas cars, we will see what happens.”

          This will happen, but it hasn’t happened yet, and there isn’t a vehicle announced yet that will do so. Wood Mackenzie estimates it will happen around 2027:
          https://www.woodmac.com/news/the-edge/electric-vehicles-transportation-disruptor-part-1/

          Again, that’s about on par with the video you linked.

          What we’re seeing in all of the above is pretty much just the market in work, though. Governmental action – a carbon price, EV rebates, and so on – would definitely tilt the field in favor of renewables adoption.

          • rhymeswithgoalie Says:

            It’s disappointing that China’s subsidy reduction of EVs (and the slowing economy) has hurt EV sales.

            Another growing force for EVs, though, are major cities worldwide which are dealing with pollution. If not actual fiat power, their ability to establish better privileges for EV vehicles will encourage EV use.

    • rhymeswithgoalie Says:

      Upon re-watching that video, it occurred to me that the 200-300 mile range requirement doesn’t apply to much of Europe.

      “In the US, 100 years is a long time;
      in the UK, 100 miles is a long distance.”

      As a city-dweller I myself don’t feel constrained by the 100m range of my Leaf (95m during hot Austin summers using A/C). (With a city full of stoplights and stop signs, an EV is a further advantage, cost-wise.)

      • jimbills Says:

        I can’t speak for Europeans.

        But for Americans, on range, I think most people would be fine with around 100-150 miles a day on their average day. You have to consider that the majority of Americans live in the suburbs, wait in traffic, etc. But….most people also take occasional long distance trips. The added range is needed for that, and they’ll factor it in when deciding on a new car. I think a 300+ mile range is really the optimum, and even then there needs to be an infrastructure system in place for reliable and quick recharging at any point.

        I can drive a little over 5 hours without stopping for gas at 70 miles an hour in a Honda Fit, and that’s not uncommon for me (around 4 times a year for work). So, the range is about 375. I’m getting gas with a 5-10 minute stop. That would roughly be the experience for long distance of many (a 350-400 mile range) – tie that with an EV, and it’s on track feature for feature. For EVs to really take off, though, it should beat any feature on an ICE car – price, range, capabilities, stop/recharge time. I think that’ll happen in the next 5-10 years, with the possible exception of infrastructure and recharge times.

  2. rhymeswithgoalie Says:

    Tangent: The rising price of platinum, rhodium and palladium has resulted in increased theft of ICE cars’ catalytic converters. (Something else this Leaf owner doesn’t worry about.)


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