For decades, ExxonMobil was an unstoppable machine. It made gobs of money, spent that cash wisely and rewarded shareholders lavishly.
As recently as 2013, Exxon (XOM) was the the most valuable company on the planet. Its market value topped out at $446 billion in mid-2014, the last time crude prices traded above $100 a barrel.
But Exxon is now a shell of its former self.
A series of strategic decisions backfired badly, from betting on natural gas at the top of the market to being late to America’s shale boom.
Exxon is now losing money for the first time in decades. Its long track record of raising the dividend is in doubt. Exxon is the poster child for the fossil fuels industry at a time of deep concern about the climate crisis. And the company’s market value has crumbled by a staggering $267 billion from the peak.
The latest humiliation for Exxon: It’s being kicked out of the Dow Jones Industrial Average, the exclusive index it’s been a part of for 92 years. Fittingly, given the swings in fortune in the modern economy and stock market, Exxon is being replaced by a technology company: Salesforce (CRM). And Chevron (CVX), a more successful company of late than Exxon, is now the Dow’s sole oil company.
“It’s pretty symbolic,” said Stewart Glickman, energy analyst at CFRA Research. “It’s a recognition that the energy sector doesn’t have anywhere near the same clout it used to.”
The energy sector comprised 16% of the S&P 500 in 2008, when oil prices spiked above $140 a barrel, according to Bespoke Investment Group. Today, the energy industry makes up a mere 2.5% of the S&P 500.
That shift reflects the transformation of the American economy in favor of technology – and the momentum in the market in that direction, too. It’s no secret that many tech companies, including Amazon (AMZN), Apple (AAPL) and Zoom (ZM) are thriving during the pandemic.
By contrast, oil companies have been crushed by the crash in prices, which briefly went negative for the first time ever, and collapse in demand.
Dividend doubts at Exxon
But the shakeup in the Dow isn’t just about the troubles of the energy industry broadly. It’s about the turmoil at Exxon specifically.
When US stocks bottomed out on March 23, Exxon was trading at the weakest level in nearly 18 years. Although Exxon has since rebounded along with the broader market, it remains down more than 40% this year. By contrast, Chevron is only down 28%.
That reflects more confidence in Chevron’s ability to make money in this turbulent period and the safety of that company’s coveted dividend.
“Chevron has been more conservative with its balance sheet. It has kept it very clean,” said Jason Gammel, an energy analyst at Jefferies.
Exxon has proudly raised its dividend 37 consecutive years, making the company a member of the dividend aristocrat group. But analysts said that streak is now in jeopardy.
Last year, Exxon relied on asset sales and borrowing to cover 64% of its dividend payout, according to the Institute for Energy Economics and Financial Analysis. That’s well above the company’s 10-year average of 30%.
“Historically, Exxon was arguably the most efficient company in the oil and gas space. The dividend, which was very manageable for them when cash flows were stronger, has become more of a burden,” said CFRA’s Glickman.
Late to shale, bad bet on gas
The seeds for these struggles were laid years ago.
In 2009, Exxon plunked down $41 billion to buy natural gas giant XTO Energy. That deal proved to be terribly timed because natural gas prices plummeted and never recovered.
Exxon – and Chevron to a lesser extent – initially failed to capitalize on the epic oil boom taking place in their own backyard. In hindsight, Exxon surely wishes it bought up land in the Permian Basin of West Texas rather than spend heavily on expensive deep water drilling projects in Russia and in the oil sands of Canada – neither of which panned out.
“Exxon and Chevron were late to the game,” said Glickman.
Those blunders forced Exxon to play catch-up. At a time when Wall Street is demanding discipline from oil companies, Exxon is spending heavily to ramp up its production in the Permian and develop offshore projects overseas.
“The market has not liked that strategy given that most peers have been trying to return more cash to shareholders,” said Gammel.
The good news is that some of those overseas bets are finally paying off.
Exxon’s investments in Guyana could prove to be lucrative as that region is expected to turn into a major source of growth for the company down the line. Exxon estimates there are more than 8 billion barrels of recoverable oil barrels in Guyana. But it will take time and money to turn those barrels into revenue.
“The problem for Exxon is investors are not valuing energy companies on the basis of 2023 results. It’s what can you do for us in 2021,” said Glickman.
Exxon’s Tesla problem
Yet even if Guyana turns out to be a win for Exxon, the company faces an uphill battle because of the climate crisis.
Exxon is the best-known company in the fossil fuels industry at a time when investors would prefer to bet on solar, wind and Tesla (TSLA).
Although European oil companies including BP (BP) and Total (TOT) have aggressively invested on renewable energy and set bold emissions targets, Exxon’s efforts have been far more muted.
“It’s a PR problem for energy companies,” said Ben Cook, portfolio manager at Hennessey BP Energy Fund. “You can either part of the solution or be seen as part of the problem.”
Of course, even the most bearish analysts aren’t predicting oil demand will vanish overnight. But a gradual shift away from crude means that only the best-run oil companies will thrive. And too often over the past decade, that has not been Exxon.