The once mighty oil giant is struggling. Profits are down, and
some big bets failed to pay off. Now a new CEO has a plan to spend
the company back to prosperity.
By Bradley Olson
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 14, 2018).
Darren Woods spent a year preparing an ambitious plan to return
Exxon Mobil Corp. to glory.
Struggling with laryngitis, the oil giant's chief executive
stepped before a ballroom full of analysts and investors at the New
York Stock Exchange in March and unveiled a strategy to spend more
than $230 billion to double profits and pump an additional one
million barrels a day of oil and gas.
As Mr. Woods walked away afterward and peered at his phone, he
received an unwelcome surprise. Shareholders didn't buy it. "Our
stock is down 3%, " he said to another executive, looking
exasperated.
Exxon faces a number of challenges, including investigations of
its accounting and tax practices as well as lawsuits by cities and
states seeking funds to pay for the effects of climate change. Its
biggest problem is one the giant has seldom faced in its 148-year
history: It isn't making as much money as it used to.
Under former CEO Rex Tillerson, Exxon bet big hunting for oil in
risky, expensive locales like the Russian Arctic. But as oil prices
fell, those projects didn't pay off the way Exxon had hoped. Now
the $350 billion Irving, Texas, company is returning to its old
ways: big, disciplined spending on prospects that make money at low
oil prices.
The approach is a gamble in a new era of energy breakthroughs
such as fracking and electric vehicles. Many of Exxon's competitors
are transforming their businesses to move away from oil
exploration, and have begun to spend carefully and diversify into
renewable energy.
Investors, who once looked past Exxon's tendency toward
arrogance and secrecy because of its good returns, aren't sure they
want Big Oil to get bigger.
"Most investors like Exxon, but they like other companies
better," said Mark Stoeckle, chief executive of Adams Funds, which
owns about $100 million in Exxon shares. "The market is not willing
to reward Exxon for spending today in hopes that it will bring good
returns tomorrow."
Exxon has been pledging to produce more oil and gas for years,
but its output of about four million barrels a day is no higher
today than it was after its merger with Mobil Corp. in 1999. Even
if Exxon succeeds in doubling last year's earnings of $15 billion
(excluding impairments and tax reform impacts) by 2025, as Mr.
Woods vowed in his eight-year spending plan, it would still be
making far less than in 2008, when it set what was then a record
for annual profits by an American corporation, at $45 billion.
In 2016, S&P Global Ratings stripped Exxon of the triple-A
credit rating it held since 1930. It was one of only three
companies to hold the distinction at that time, along with
Microsoft Corp. and Johnson & Johnson. While Exxon once ranked
as the world's largest company by market value, it was 10th as of
June 30, less than half the size of Apple Inc.
Through a spokesman, Mr. Woods declined to comment. Exxon
declined to make other executives available for interviews. Exxon
has denied wrongdoing related to the climate litigation and other
probes it is facing, and insisted the lawsuits are the wrong way to
deal with climate change.
The company traces its history back to Standard Oil, the name
oil titan John D. Rockefeller gave to his powerful monopoly to
signify control, order and uniform quality. The U.S. Supreme Court
broke up the monopoly in 1911.
Exxon, the largest descendant of that monopoly, bears a
resemblance to Standard Oil even now. While a powerful CEO sets the
company's direction, Exxon is ultimately run by a committee of a
handful of executives, dubbed the "God pod" by employees. Much as
it was in Mr. Rockefeller's time, they divide oversight
responsibility over Exxon's vast reach, which now spans 51
countries and six continents and includes more than 70,000
employees.
It became the biggest public company in the world by revenue in
1975, and over the next 3 1/2 decades it was often the most
profitable, even when oil prices were low. Exxon excelled in coming
through on budget and as scheduled in projects rife with political
and engineering complexity.
The company's process included a painstaking analysis of all
decisions, major and minor. Projects were judged based on an
assumed oil price often as much as 50% or more below current or
forecast prices, according to more than a dozen former employees
and executives.
Its leaders confidently steered the company through oil crashes,
foreign conflicts and clashes with Wall Street. Lee Raymond,
Exxon's boss from 1993 to 2005, personified the swagger at the
heart of the company's ethos. He was notorious for making fun of or
criticizing the questions of Wall Street analysts, often to their
faces, and he was equally dismissive of some shareholders at annual
meetings.
That style rankled some rivals and investors, but Exxon backed
it up with best-in-class performance.
Exxon's stock traded at a premium to its peers for decades, a
trend that intensified after the company's purchase of Mobil.
Investors at times recognized twice the value in Exxon's assets
compared with rivals BP PLC, Total SA, Chevron Corp. and Royal
Dutch Shell PLC.
For years, Exxon "operated like a perfect machine," said Uday
Turaga, a former ConocoPhillips executive who now runs consulting
firm ADI Analytics. "It is a process-driven, extremely disciplined
organization."
About a decade ago, Mr. Raymond was succeeded by Mr. Tillerson,
a folksy Texan who came from the so-called upstream side of the
business, which explores for and produces oil and gas, and who had
a penchant for personally negotiating big oil-production deals
himself.
As prices rose to all-time highs of almost $150 a barrel, Mr.
Tillerson led the charge to chase more expensive prospects that
could meet the world's thirst for crude. He looked to Canada's oil
sands, natural gas fracking and even Russia's Arctic, all of which
required higher prices to be profitable.
Those efforts largely failed. Exxon's production has declined in
the past five years, and the company has delivered lackluster
financial results. Today, oil prices are around $74 a barrel.
Mr. Tillerson, who left in 2017 for a short-lived stint as
President Donald Trump's Secretary of State, produced returns of
about 6% a year during his tenure, including dividends -- far less
than the S&P 500 or rivals Chevron and Shell in that period,
according to FactSet. Mr. Tillerson didn't respond to requests for
comment.
In need of a chief executive who could return Exxon to its prior
glory -- and who could help Exxon confront a multitude of critics
and a new energy landscape -- the board turned to the 53-year-old
Mr. Woods.
A tall, white-haired electrical engineer originally from Kansas,
Mr. Woods came up through the ranks of Exxon's refining division,
where profits come from squeezing pennies out of every barrel.
He is an enthusiastic believer in the company's traditions. In
one of his first public presentations as a top executive, given in
2015 to a labor conference in the Dallas area, he repeatedly
praised the company's risk and accountability methodology, known as
the Operations Integrity Management System. He mentioned the wonky
acronym, OIMS, 13 times in a short speech.
As he prepared to take the reins from Mr. Tillerson more than a
year ago, he held a series of dinners with close advisers,
according to people familiar with the meetings. At one dinner, he
received a query: What if Exxon is wrong in its view of a bright
future for fossil fuels? What if the greatest risk to the company
is hubris?
Mr. Woods acknowledged the threat the company faces from shale
drilling, electric vehicles and climate hawks, according to a
person familiar with the discussion. Renewable energy opportunities
weren't yet profitable enough to compete with other Exxon projects,
Mr. Woods said. When they are, the company will be ready.
For now, he added, the best way forward was for Exxon to do
things the Exxon way.
His faith in Exxon's process was one of the top reasons he was
selected by the board to succeed Mr. Tillerson, according to people
familiar with the decision.
Among the company's recent challenges: Exxon wound up
miscalculating the political risks of doing business in Russia,
which came under U.S. and European sanctions in 2014, and walked
away earlier this year from joint ventures with state-controlled
PAO Rosneft to drill for oil in the Black Sea and Arctic waters.
Last year, the company was forced to acknowledge that 3.6 billion
barrels of reserves in Canada -- from an oil sands project that
cost more than $20 billion -- were no longer profitable to
produce.
Another blunder, analysts say, was the 2010 purchase of XTO
Energy Inc., one of the pioneers of modern fracking. Exxon bought
the company for more than $30 billion, when natural gas prices were
higher than they would be at any point over the next seven
years.
In the past two years, Exxon has written down the value of its
U.S. natural gas assets, which include its XTO unit, by $2.5
billion, an unusual step for the company. In 2015, Mr. Tillerson
told trade publication Energy Intelligence that at Exxon, "we don't
do write-downs."
Exxon's fracking prospects in the Permian basin in West Texas
and New Mexico, developed by its XTO unit, remain among its most
profitable opportunities, the company says. Still, its U.S.
drilling business has lost money in 11 of the last 15 quarters.
Mr. Woods has taken several steps to shake up Exxon's
insularity, embrace new risks and jettison less profitable areas.
People familiar with the matter said Exxon is weighing reducing its
exposure to Canada, where it has operated for 130 years. Getting
oil from Canada's oil sands is expensive, and the prospect of
reduced exposure has signaled to some advisers that the company may
become more aggressive in seeking transformation.
The company is also developing a more robust trading operation
with an eye toward using regional oil and gas price disparities in
the U.S. and around the world to boost profits, according to people
familiar with the process.
Still, the centerpiece of Mr. Woods's turnaround effort is a
major increase in spending, much of which is focused on drilling in
Brazil, Papua New Guinea, Mozambique and Texas. In March, he said
such opportunities are the best Exxon has seen since its merger
with Mobil. They will make it possible for the company to produce
an additional one million barrels of oil and gas a day, he said.
Combined with existing production, that would equate to five
million daily barrels, a record for Exxon.
Next year, Exxon is set to spend $28 billion, 45% more than in
2016. That's a marked difference from rivals such as Chevron, which
is holding investment levels flat this year and 18% below 2016
levels.
Shareholders haven't responded with enthusiasm. The price of
crude is up about 60% in the past year, but Exxon shares are up
less than 5%.
Earlier in the year, analyst Paul Sankey, then of Wolfe
Research, said clients were calling for an activist investor to
force the company to take more "radical action." The unrest has
calmed somewhat with oil's rally, analysts say. But shareholders
are still looking for big change.
"Darren Woods is turning the Exxon Mobil supertanker, but the
scale of the challenge is giant," said Mr. Sankey, now an analyst
at Mizuho Energy. Exxon is poised to rebound in three to five
years, but other companies are better bets for now, he said.
Investors are favoring smaller, nimbler competitors.
ConocoPhillips, which has seen its shares rise 60% since last year,
shed a number of businesses and promised to distribute much of its
excess cash to shareholders in coming years rather than
reinvesting.
From January to March, EOG Resources Inc., the biggest American
shale producer, reported higher per-share profits than Exxon, a
company five times its size. EOG's stock is up 84% in the last five
years. Exxon is down about 10% in that time.
Meanwhile, rivals such as Shell, BP and Total have diversified
outside of fossil fuels.
"Through the ups and downs of oil prices, Exxon always had very
high returns, but that has changed," said Jonathan Waghorn, a
portfolio manager at Guinness Atkinson Management Inc. It sold out
of its Exxon position last year.
--Alison Sider contributed to this article.
Write to Bradley Olson at Bradley.Olson@wsj.com
Corrections & Amplifications The chart on oil and gas
production is in millions of barrels a day. An earlier version of
this article incorrectly stated in the chart that production was in
billions of barrels a day. (July 13, 2018)
(END) Dow Jones Newswires
July 14, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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