Exxon Stares at Deficit of $48bn on Weak Oil Demand

Exxon Stares at Deficit of $48bn on Weak Oil Demand
September 9, 2020


The stock of Exxon Mobil Corp (NYSE: XOM) declined 2.30% or $0.90 to close at $38.18 on Tuesday, following news reports that the company’s poorly timed capital outlays based on increasing demand for oil could cause a deficit of roughly $48 billion through 2021. To manage the underfunding, the company may have to slash employees and stop or postpone some ventures. Investors are also worried that the company could look at dividend cuts.

The Irving, Texas-based Exxon overcame a plethora of reversals in the past decade, and under CEO Darren Woods, showed signs of regaining past glory through significant investments on the US shale oilfields, refineries, and even petro-products such as plastics. The company also made huge investments on offshore Guyana, where it uncovered 8 billion barrels of oil, representing six years of production at the prevailing rate.

But there is no guarantee about Exxon’s ability to fund the aforementioned worldwide expansion. So far this year, the company has borrowed $23 billion to settle its bills, eventually doubling its outstanding debt. In July, the company reported its first sequential quarterly losses. As per equity research firm Refinitiv, the company is expected to post a full-year loss of $1.86 billion, barring asset sales or write-downs.

The imminent deficit of roughly $48 billion through 2021 was computed utilizing cash from operations, capital required for a huge expansion program, and shareholder payout commitments. The company is currently reviewing all its plans to identify spots for trimming expenses. Analysts feel that even a dividend cut could be on the line.

Since the beginning of this year, oil prices have declined 35% as demand crashed during the coronavirus outbreak. The decline in oil demand has ripped apart Woods’ aim to spend a minimum of $30 billion per year via 2025 to increase output and profits by boosting oil processing capacity, in addition to raking up chemical production. The company also intended to take a lead role in the US shale and liquefied natural gas production and realize impressive gains from the market, which looked promising at that time. Contrary to expectations, Exxon now faces challenges surrounding weak prices and sluggish demand for oil, gas, and plastics.  For the first time in 92 years, the company has lost its place in the Dow Jones index of top US industrial companies.

The company is also expected to lay off thousands of employees and terminate some of the generous retirement benefits that encouraged employees to stay for 30 years (on average).

The company spokesperson Casey Norton stated that the cost cut plan would be revealed next year. Norton said: “We remain committed to our capital allocation priorities – investing in industry advantaged projects, paying a reliable and growing dividend, and maintaining a strong balance sheet.”  

Major oil consumers in Europe are also shifting to renewable energy at a brisk pace. Likewise, top oil producers are also reducing their dependence on fossil fuel. BP intends to bring down its fossil fuel production by 40% in 2030.

A Reuters analysis indicates that Exxon’s cash from operations, projected to be roughly $17.40 billion in 2020, is $20 billion below the funds required for paying shareholders dividends and completing the planned investment. This implies Woods will need to arrange fresh funding to manage the commitments.

Mark Stoeckle, senior portfolio manager at Adams Funds, believes that it will be difficult to achieve the objectives. “At $41 or $42 [per barrel] crude, you can’t put those puzzle pieces together and have them make sense.”

Adams Funds, which owns roughly $70 million worth of Exxon shares, expects a dividend cut. Investors who hold the stock for approximately 9% annual dividends are worried about the weak cash flow.

Projects which are expected to face a downward revision of budget or may get postponed are as follows:

  • According to Rystad Energy, Permian Basin Shale field spending is expected to be trimmed to $3 billion, from $7.40 billion earlier.
  • $10 billion+ LNG facility in Texas is already behind schedule and the company (holding 30% stake) is not trying to expedite the project.
  • A huge LNG project in Mozambique is not expected to get investment until 2023.
  • Exxon is expected to reduce offshore activity in Mexico.
  • The $1.90 billion expansion of Beaumont (Texas) refinery is facing a one year postponement.

Before the outbreak of the COVID-19 pandemic, Woods had forecast earnings of $25.10 billion, assuming $60 per barrel for oil and flat refining and chemical margins. Analysts believe that Woods may have to downwardly revise the estimates soon. Furthermore, analysts at Scotiabank and RBC Capital markets anticipate a decline in capital outlays to a range of $10.40 billion to $15 billion.

The news of likely deficit and reduction of dividend is expected to keep the stock range-bound with a slight bearish bias in the short-term.

The price chart below indicates that the stock of Exxon Mobil is declining after facing resistance at 42. The next support is anticipated only near 33.

Furthermore, the stock is trading below its 50-day moving average, and the stochastics indicator is in the bearish zone. Therefore, we are anticipating the stock to remain in a downtrend for the next few days.

xom - technical analysis - 9th September 2020

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Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world

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