In 1999, Enron CEO Jeff Skilling mocked ExxonMobil, the largest U.S. oil and gas company, calling it a “dinosaur.” Yet Exxon lumbered on, churning out steady profits, even after Enron collapsed in bankruptcy two years later and Skilling went to prison for fraud. But now, as the planet continues to heat up, COVID-19 has blasted into Exxon’s finances like some giant asteroid.
The energy industry is evolving, and large fossil fuel producers like Exxon must transform or get left behind. While its major rivals such as BP and Shell have invested in renewables, like wind and solar, or shifted to producing more natural gas, which emits less carbon, Exxon has insisted on staying the course even as investors and consumers increasingly turn away from dependence on oil.
Late last month, Exxon reported a third-quarter loss of $680 million. That’s a big number, but it’s actually an improvement from the record $1.1 billion loss it saw in the second quarter. So far this year, Exxon has lost a staggering $2.4 billion—the first time in the Irving-based company’s 138-year history that it’s reported three consecutive quarterly losses. In August, Exxon was ousted from the Dow Jones Industrial Average, America’s preeminent stock market index, after being a member for almost a century. One of the companies that replaced it was Salesforce, a cloud software company. Apple, with a market value of some $2 trillion, is now worth more than all the major oil companies combined.
Just seven years ago Exxon boasted the biggest market value of any company in the world and was heralded for its reliable returns and consistent financial performance. In 2020, until the post-election rally this week, it couldn’t even claim to be the most valuable energy company. NextEra, a Florida-based operator of wind farms and solar arrays had whizzed past it, although the two companies traded places again on Monday. Still, since 2018, Exxon’s market capitalization has fallen by about 60 percent, while NextEra’s shot up 98 percent.
The entire oil industry has been taking it on the chin since the coronavirus forced millions of Americans to work from home and put millions more out of work, resulting in a lot less commuting. At the same time, there’s too much oil available in the world, which is why prices have tumbled to around $40 a barrel after starting the year at more than $60 (and making a brief but stunning dip into negative territory in April).
So far this year, Exxon has cut $10 billion, or about 30 percent, of its capital spending and slowed projects around the globe. It may consider selling some assets, and it’s been borrowing to avoid cutting its dividend to shareholders, which has long been seen inside and outside the company as sacrosanct. After insisting for months that it would avoid the layoffs that have battered other oil producers—more than 40,000 jobs, or 14 percent of the oil and gas workforce, have been lost in Texas alone this year—Exxon chopped 1,900 jobs at its Houston-area offices. The cuts came after the company said it will stop matching contributions to employees’ 401(k) retirement plans in October.
Like most other oil companies, Exxon faces a fundamental problem: as the price of oil falls, so does the value of its reserves. Already, other major producers have greatly reduced how much they value their reserves in their own accounting—Shell to the tune of $22 billion and BP by $17.5 billion. Exxon has resisted following suit, although it indicated last month that may be coming.
“Exxon had these valuable reserves, but right now, the market says reserves in the ground may not be worth very much,” said Clark Williams-Derry, an analyst with the Institute for Energy Economics and Financial Analysis. “This has led to a rethinking of the economics of oil and how you value oil companies.”
The company’s financial struggles are compounded by the seeming reluctance of Exxon management to change direction. Chief executive Darren Woods launched an ambitious $230 billion spending plan two years ago to boost production by one million barrels a day by 2025. Yet production has inched up only slightly since then. Exxon executives have been slower than many of their industry peers to acknowledge concerns over climate change, and the company’s annual outlook for oil consumption typically is more optimistic than those of its rivals. Exxon has increasingly become an outsider among the majors, many of whom, such as Shell and BP, have announced large investments in renewables projects this year. Woods has been dismissive of those moves, which remain a small percentage of those companies’ overall capital investment.
This summer has intensified the pressure on oil companies as a string of natural disasters has ravaged the U.S., from wildfires on the West Coast fueled by record heat and dry winds to a seemingly unending hurricane season with so many named storms that we will soon run out of Greek letters with which to name them (having already blown through the English ones).
Google has pledged to use only carbon-free energy sources by 2030, and Amazon has made a similar pledge for 2040. Such corporate policies, if they spread, could have a profound effect on demand. BP, which itself has pledged to eliminate or offset all emissions by 2050, has predicted global oil demand could fall by as much as 80 percent in the next thirty years. Bank of America has forecast peak demand in a decade.
Investors are turning away too. Some of the world’s biggest fund managers have vowed to liquidate their fossil fuel holdings and concentrate on renewables. Meanwhile, policymakers are also getting in on the act. The mayors of twelve major cities—representing 36 million people around the world, though none in Texas—have joined a forum calling for divestment of fossil fuels.
Consumers, driving less during the pandemic, may not return to their old habits once it’s over. In his latest book, The New Map: Energy, Climate, and the Clash of Nations, energy guru Daniel Yergin predicts electric vehicles may account for as many as eight of ten cars on the road by 2050 and as much as 80 percent of all new car sales, compared with just 2.2 percent in 2020.
Even the industry itself is getting on the environmental bandwagon. Just before Exxon announced its quarterly loss last month, the Independent Petroleum Association of America, an industry trade group, announced it was launching a center that will advise its members on how to build programs around environmental and social issues.
Against this backdrop, Exxon’s continued allegiance to fossil fuel development seems out of step. It continues to make big bets in areas like the Arctic—President Trump recently signed an executive order allowing drilling in the Arctic National Wildlife Refuge’s 1.56 million-acre coastal plain. Environmental groups fired off a letter to Woods and CEOs of other companies operating in Alaska warning of a “major public backlash” and long-lasting reputational damage for companies that drill in the region. It’s not clear if President-elect Joe Biden will reverse the action when he takes office in January.
Exxon remains a huge company with vast financial resources that can weather severe downturns like today’s. Yet it increasingly appears to have become just the sort of plodding giant that Jeff Skilling once derided it as, rather than the industry pacesetter it was.