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Exxon in ‘Bull's-Eye’ as Worst Year

Since Reagan Limps to a Close
• Company stock on track to drop most since 1981 this year

• Woods wants time to rebuild oil giant; investors want payback

Things haven’t been this bad for the world’s biggest oil stock since Ronald Reagan
became president. But brace yourself, 2019 may not be much better.

Exxon Mobil Corp., down 22 percent for the year, is headed for its worst annual
performance since 1981, when the U.S was in recession and a 20-year crude glut was
just beginning. The decline comes as Exxon pursues one of the largest restructurings in
its modern history, a seven-year, $200 billion push for oil in South America and natural
gas in Mozambique and Papua New Guinea.

With one of corporate America’s strongest balance sheets, the concern isn’t whether
Exxon can fund the rebuild. The question from investors: What can you do for me in the
meantime? The awkward answer may be "not much," at a time when oil prices are

As rivals restrain growth and buy back stock, Exxon is the one “with the bull’s-eye on
their back,” said Mark Stoeckle, who manages $2.6 billion including Exxon shares at
Adams Express Co. “They weren’t terribly efficient in the last cycle. What do they do
differently? This time it has to work.”

That may be more difficult with Venezuela making aggressive naval maneuvers
targeting the company’s ships in Guyana, where Exxon is pursuing one of its much-
needed sources of new oil production. Perhaps more importantly, oil prices in New York
have fallen more than 40 percent since reaching a high of $76.41 on Oct. 3.

It’s a double-edged sword for the architect of the restructuring, Chief Executive Officer
Darren Woods.

On one side, it validates his strategy to build lower-cost oil and gas assets abroad that
can withstand the uncertainties that come with the shale boom, as well as the transition
to cleaner energy sources. On the other, it puts him at odds with investors who, seeing
the uncertainty, want companies to return as much profit to shareholders now as

Royal Dutch Shell Plc, for instance, is down less than 10 percent for the year after
stepping up its buyback program at the end of October, when oil prices were still high.
The company said it will repurchase $2.5 billion of shares, compared with $2 billion in
the previous tranche. Exxon has made no similar effort.

Exxon has “the longest view of any company,” said Stoeckle, who supports Woods’s
strategy. “Investors need to either ignore them or come to grips with the fact they’re
going to do what they’re going to do, and stop complaining.”

Flag-Planting Deals
Exxon’s problems largely stem from flag-planting deals made at the peak of commodity
prices over the past decade. Exxon spent $35 billion on U.S. shale gas producer XTO
Energy Inc. in 2010 when the real money was to be found in shale oil. It invested $16
billion in Canadian oil sands since 2009, only to de-book much of the reserves.
Meanwhile, former CEO Rex Tillerson’s 2013 exploration pact signed with Russia was
caught behind a wall of sanctions and later abandoned.

The history of Big Oil shows that when faced with declining production or reserves,
executives tend to bulk up with mergers or acquisitions. Instead, at least publicly,
Woods’s answer is to go back to basics: buy or discover what he believes to be the
world’s biggest and lowest-cost resources, develop and operate them, and then move
the resulting oil and gas into Exxon’s global refining and chemicals supply chain.

The five key development areas -- deepwater oil in Guyana and Brazil, liquefied natural
gas in Mozambique and Papua New Guinea and shale oil in the U.S. -- were not in
Exxon’s portfolio in 2014. Woods says they will generate half of upstream earnings by

Resource Base
“The resource base wasn’t up to scratch for the post-2014 oil price environment so they
needed to move down the cost curve,” said Fernando Valle, a New York-based analyst
at Bloomberg Intelligence. “It will take a lot of time and investment for them to catch up,
but it’s something they have to do.”

Shale oil holds the most promise for the short-term. Exxon this year overtook its rivals to
become the most active driller in the prolific Permian Basin, where the company has
said it shale wells can make double-digit returns with oil at just $35 a barrel. Still the 40
percent drop in oil prices since October have pushed oil sold in New York below $45,
leaving less and less room for profit.

Meanwhile, investors are worried the projects abroad will take years to fully develop.
“I’m not sure how much of the market is moving on a 20-30 year time horizon,” Woods
said in an interview in May. “There’s a little bit of a disconnect between how the market
thinks about the business and values it in the time frame that it’s using, versus what we
have to do internally.”

Call Policy
Perhaps to gain time, Woods has made some efforts this year to win over Wall Street.
After being attacked by analysts for being one of the only companies not to put
executives on quarterly conference calls, Exxon changed its policy, with one member of
the management committee, known as the ‘God Pod’, now taking questions.

Famously secretive, the company also gave shareholders more financial information
and access to board members. But those efforts have had little effect on the stock price
in the face of earnings reports that disappointed investors. Year-on-year production has
declined nine of the last 10 quarters and earnings have missed estimates four of the last

Exxon’s production of 3.65 million barrels a day in the second quarter was the lowest in
a decade.

(Updates with share price decline in second paragraph, Venezuela in fifth.)