02/05/2020 Biggest US energy groups lay out oil crash strategy | Financial Times

Exxon Mobil Corp

Biggest US energy groups lay out oil crash strategy
ExxonMobil and Chevron deploy plans for cutbacks but preserve dividends

Both ExxonMobil and Chevron defied European rivals’ talk of peak oil, viewing the plummeting demand as a short-term
disruption © REUTERS

Derek Brower, US energy editor YESTERDAY

ExxonMobil and Chevron, the US’s two biggest energy producers, have laid
out their strategy to cope with the worst crude oil price crash in history: cut
back now, keep investors happy, and be ready for a market recovery.

They will not touch the dividend, they said on Friday, despite the
announcement a day before from Royal Dutch Shell, the supermajors’ biggest
European rival, that it would slash its payment to shareholders as part of a
longer-term transition away from fossil fuels.

“The dividend is secure,” said Mike Wirth, Chevron’s chief executive, in an

interview after announcing first-quarter earnings that bucked an industry-
wide trend of losses. Chevron’s earnings rose year-on-year by about a third,
to $3.6bn.

Exxon’s quarter was not as bright. It posted a loss of $610m compared with
profits of $2.4bn a year earlier. The drop included a non-cash charge of
almost $3bn to account for the impact of weaker oil prices on the value of its
inventory and assets. Cash flow from operations and diluted earnings per
share both came in above analysts’ forecasts.

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02/05/2020 Biggest US energy groups lay out oil crash strategy | Financial Times

But Darren Woods, Exxon’s chief executive, was equally adamant on the topic
of his company’s cherished payout to shareholders.

“I don’t look to what Shell is doing to decide our dividend policy,” he said on
a conference call on Friday. The dividend was “an important part of the value
proposition” for Exxon’s shareholders.

Both US oil heavyweights will, though,

continue to cut capital spending. Exxon
There’s always room is sticking with the 30 per cent
for one more notch reduction this year, to $23bn, that it
tighter on the belt announced last month. Chevron went

Mike Wirth, Chevron chief executive

deeper, lopping another $2bn from its
planned capital spending in 2020, which
will now be as low as $14bn.

Exxon’s share price closed about 7 per cent lower on Friday. Chevron’s ended
down about 2.5 per cent, faring slightly better than the weaker S&P 500
index.

US shale, where activity can be dialled up or down quickly, will bear the brunt
of the two companies’ cuts. Exxon’s output from the Permian basin was about
350,000 b/d in the first quarter but will end the year lower as capital
spending cuts bite. In March, Exxon made the Permian the centrepiece of the
group’s growth strategy.

Chevron had targeted production of 600,000 b/d from the area by the end of
the year, but has since scaled this back to 475,000 b/d — lower than first-
quarter production. Activity is quickly winding down, with just five rigs
working compared with 17 earlier this year.

Mr Wirth said the cuts could deepen if the market worsened. “There’s always
room for one more notch tighter on the belt.”

Idling rigs cuts US production quickly because output from shale wells
declines so steeply after an initial spurt. Thousands of new wells are needed
each year just to keep overall supply flat, let alone growing.

Much more radical — especially for supermajors accustomed to riding out

price cycles — is that the two companies are joining smaller producers in
choosing to shut producing wells.

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Chevron will shut off as much as 400,000 b/d of supply in June, equivalent
to almost 15 per cent of the group’s total output. About half of that will come
from its international business, including in Opec countries that from May 1
began enacting deep supply cuts.

Exxon said it would cut a similar amount in the second quarter, about a third
from operations in Opec countries and the rest curtailed from the Canadian
oil sands and Texas’s Permian projects.

Yet however drastic this seems, both companies seemed sanguine, viewing
the crisis as a short-term disruption — not a long-term threat to the oil
business.

Mr Woods pointed to population growth and global economic expansion as

fundamentals that would underpin rising long-term need for his company’s
fuels — a mantra of the Texan energy giant that defies its European rivals’
talk of peak oil demand.

Far from couching in fear, Exxon has continued to raise debt through the
downturn and increased a revolving credit facility to $15bn. Mr Woods said a
strong cash position helped the company remain “flexible to market
developments, including an eventual recovery”.

The company’s decision not to reduce spending further this year also pointed
to its confidence in a recovery, suggesting Exxon was keen to keep spending
counter-cyclically.

It may need a price recovery. Biraj Borkhataria, an analyst at RBC Capital

Markets, praised Exxon for a strong first quarter, but noted its $75 a barrel
break-even oil price was much higher than the average of $50 among its
peers.

Brent, the international oil benchmark, closed at $26.44 a barrel on Friday.

Chevron said it had “stress-tested” its business at a long-term price of $30 a

barrel. It found that even if it took on more debt to fund capex and paid
$10bn a year in dividends, the company would end 2021 with a net-debt ratio
of less than 25 per cent, well beneath Chevron’s peers, said Pierre Breber, its
chief financial officer.

By then, the oil heavyweights hope, a recovery may have taken hold.

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Exxon’s chief even said the curtailments to production now could cause a
shortage of oil supply by the end of 2020, although burgeoning stocks would
keep prices from rallying too high.

Mr Wirth, at Chevron, also suggested the worst of the crisis was upon the oil
sector. “It feels like you’re bumping along the bottom in terms of demand,”
he said. “It feels like this quarter and perhaps the next quarter are going to be
the toughest quarters.”

If the nadir is imminent, so too is the part in the oil-price cycle when the
supermajors begin feeding on smaller rivals. The distressed shale patch looks
ripe for a wave of mergers.

Mr Woods said the “opportunity exists” and consolidation would “resonate in

the industry”. Mr Wirth said he was “alert to the opportunities” but Chevron
would be “patient and prudent”.

Last year, Chevron briefly fought a takeover battle with Occidental Petroleum
to buy Anadarko. Occidental won, paying $56bn. Chevron walked away with
a $1bn break-fee from Anadarko.

Since then, Occidental’s own market capitalisation — including Anadarko —

has slumped to barely a third its value at the time of the deal. Chevron’s
powder has remained dry. Could it be tempted back?

“We’ve moved on from that,” said Mr Wirth. “Deposited the cheque and
moved on.”

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