At Today’s Oil Prices, Exxon’s Money Machine Is Broken

Exxon’s money machine is broken. At least at these oil prices. The oil giant posted a loss of $680 million today, its second quarterly loss in a row, following a $1 billion hit in the second quarter. Exxon received an average $37 per barrel for its U.S. crude oil in the third quarter, a big improvement on its average $21/bbl in the second quarter — but not enough.

 

CEO Darren Woods in a prepared statement said the company was taking bold measures to navigate the “unprecedented down cycle.” Those moves include broad layoffs that will hit some 14,000 positions out of 74,000 nationwide, including 1,900 cuts to come in the U.S., mostly at its campus in The Woodlands, north of Houston. Already last month Exxon suspended employee retirement plan matching.

 

During the last oil downturn of 2016, the company chose to maintain a high level of investment — confident that as the cycle turned up its steadfastness would be rewarded. Not this time. Exxon during 2020 has slashed its capital spending, to about $17 billion a year from a pre-pandemic level of closer to $30 billion. Unable to generate enough cash, Exxon has grown its borrowing to more than $60 billion in order to keep up with its $3.7 billion in quarterly dividend payments.

 

At a current $32.28 per share, down more than 50% in the past year and off 2% today, Exxon shares yield 10% — high enough to give Woods cover to cut the payout if needed. So far Exxon has resisted any suggestion that it consider cutting its $3.48 annual dividend — something it hasn’t done, according to company records, since at least the 1970s. Exxon has also told investors that it will make those dividend payments without adding on any more “gross” debt.

 

If that’s the case, then it looks like Exxon is going to need to start selling assets to make ends meet. Jason Gabelman, analyst at Cowen & Co., figures that unless oil prices ($36/bbl WTI today) stage a remarkable comeback Exxon will end up about $5 billion in cash short of that objective in 2021. And that assumes success in Exxon’s stated plan to divest $15 billion in assets.

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