Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Listen to one of Exxon Mobil's carefully calibrated earnings calls, and you'll understand the company isn't into spontaneity. Which is good, because investors in Big Oil generally don't value surprises.

Unfortunately, they've had to endure a few of them recently, the latest being Friday's announcement by Exxon that it didn't replace its reserves in 2015 for the first time in more than two decades. This comes soon after Standard & Poor's threatened to possibly cut Exxon's coveted triple-A credit rating and the company suspended its long-standing buyback program.

Unsettling as all this might be, it adds pressure for Exxon to shake things up a bit.

While Exxon more than replaced its oil production last year, it actually reduced its proved natural gas reserves by about 5 trillion cubic feet. That is more than three-quarters of all the gas it found and booked as proved reserves over the previous three years (not including gas that it acquired).

Reserves can magically disappear like this when prices fall low enough to make them uneconomic to produce. Natural gas, which has slumped again amid a relatively mild winter, certainly fits that description. The bigger problem for Exxon is that medium-term price expectations have plummeted since December 2009, when it announced its last big acquisition, that of shale-gas producer XTO Energy.

Natural gas futures have collapsed since Exxon announced the XTO deal.
Source: Bloomberg

In 2010, when that acquisition closed, Exxon's proved gas reserves jumped to almost 79 trillion cubic feet (equivalent to almost three years of U.S. gas consumption, in case your trillion-cubic-feet envisioning skills are rusty). By the end of 2014, they had already fallen back almost to where they were before XTO was absorbed. Friday's news implies they have now plunged below that level.

Still Big
Exxon's proved oil reserves have risen steadily while gas reserves have dropped
Source: company publications
Note: 2015 data inferred from reserve replacement and production data. Natural gas converted at a ratio of 6,000 cubic feet per barrel

With north of 60 trillion cubic feet still likely in the tank -- plus more in probable reserves -- Exxon isn't going to run short of gas (or oil, for that matter). And a recovery in prices could help it re-book those lost reserves, although futures prices don't point to that happening anytime soon.

This latest stumble does, however, illustrate the strain on Exxon as it tries to both maintain dependable payouts to shareholders and grow from an already huge base.

Last year, Exxon produced about 4.1 million barrels of oil equivalent per day. That was actually 6 percent lower than its output 10 years previously.

Gas production, while slightly higher than in 2006, has fallen by a quarter since peaking in 2011. Constraints imposed on Exxon's giant Dutch gas field following earthquakes haven't helped, but neither has a glutted U.S. and, increasingly, global gas market.

With oil, the story is slightly different. Exxon's oil and liquids output jumped by 11 percent last year. The bad news is that this was still 12 percent less than what the company produced a decade before -- and each barrel fetched a lot more back then.

Exxon's overall oil and gas production hasn't gone anywhere for a decade
Source: company publications
Note: Natural gas converted at ratio of 6,000 cubic feet per barrel

The unfortunate timing there shows up where it really hurts: Cash flow. Exxon's cash from operations last year, while a gargantuan $30.3 billion, was the lowest since 2003, according to numbers compiled by Bloomberg.

No prizes for guessing that last year's oil-price crash played a big part in that. But now consider that Brent crude averaged about $52 a barrel. The last year where it averaged something close to that was in 2005, when it was almost $54. Exxon's cash flow that year: $48.1 billion. What is more, less than $14 billion of that went into capital expenditure, leaving ample cash flow to cover more than $25 billion of dividends and share buybacks. Costs have soared in the interim.

Last year's cash flow covered the capital expenditure bill of about $26 billion -- defined as additions to property, plant and equipment -- but that left Exxon having to borrow to cover part of its dividend and, of course, suspending buybacks.

The latter matters because of Exxon's lack of growth. By steadily reducing the number of shares outstanding, the company has offered rising production on a per-share basis, even as the absolute amount of oil and gas has fallen. But that growth has flattened out in recent years.

Barrels Per Share
Exxon's production rose sharply on a per share basis until 2010
Source: company publications
Note: Natural gas converted at a ratio of 6,000 cubic feet per barrel

With Exxon targeting a huge cut in spending this year, medium-term growth prospects look questionable. This is especially the case with oil futures currently implying Brent to average even less this year, perhaps below $40 a barrel, meaning buybacks may be off the table for some time.

For as Exxon's production per barrel has stalled, its financial profile has deteriorated, albeit from a very high level. The chart below shows the company's cash flow, capital expenditure and net debt on a per-share basis. The short story is that you really don't want these lines to converge:

Don't Cross the Streams
Exxon's cash flow per share has deteriorated while its capex bill has jumped, leading to rising leverage
Source: Bloomberg, company publications

Exxon's big selling points are its reliability and, at least on a per-share basis, some semblance of growth to underpin rising dividends. With both coming under strain, and distress spreading through the exploration and production sector, the odds of Exxon making a major acquisition to reset the clock are rising fast.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at

To contact the editor responsible for this story:
Mark Gongloff at