Exxon's Post-Tillerson Fortunes Closer to Home as New CEO PivotsBy
Pursuing oil in South America, U.S. rather than Asia, Africa
Market rout erased billions as 19% of reserves now uneconomic
Exxon Mobil Corp. is pinning its fortunes closer to home as new CEO Darren Woods veers from the oil titan’s longtime focus on Asian and African riches.
After a two-year pricing rout erased 19 percent of Exxon’s untapped crude by making it unprofitable to extract, Woods faces a tough task in sustaining the company’s output. His ability to replenish the portfolio will rely heavily on regions the driller long avoided: the U.S. Great Plains and Latin America.
Woods’s first public appearance since becoming chief executive officer is Wednesday, when analysts will press him for operational details at Exxon’s yearly strategy session. Findings off South America’s Guyana coast and in the shale fields of Oklahoma, Texas and New Mexico could help him restore profits, recover from a $1 billion stillborn venture in the Russian Arctic, and replace aging supply sources in West Africa and Indonesia.
“Not a lot is known about him beyond his work history,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis who has a “hold” rating on Exxon’s shares. “People are going to want to hear what he plans to do about cash flow over the next few years, what kind of oil price they need, and the outlook for production.”
A Kansas-born electrical engineer by training, Woods, who is 52, joined Exxon as an analyst in 1992 and rose through the ranks on the refining and chemicals side of the business. He succeeded Rex Tillerson, who now serves as President Donald Trump’s secretary of state, as CEO and chairman on Jan. 1.
His leadership comes at a time when the largest U.S. oil producer is facing tough challenges in recovering from a market collapse that erased more than $154 billion in Exxon’s discounted future cash flows as fields that prospered during the oil bull market became money losers. Exxon has fallen more than 9 percent this year after rising 16 percent in 2016. Shares rose 16 cents to $81.70 at 9:35 a.m. in New York.
At the same time, Woods removed the equivalent of 3.3 billion barrels of untapped crude from the books last week in the biggest reserves reduction since the company’s $88 billion takeover of Mobil Corp. in 1999. The huge African and Asian prospects acquired in that deal have mostly been exhausted, and the Irving, Texas-based company has been drifting back to the west ever since.
Exxon disputes the usefulness of discounted future cash flows, which it is required to file annually under U.S. Securities and Exchange Commission rules. And the company said the reduction in reserves is only a short-term setback since those barrels can be reclaimed as prices rise, and remain available to be pumped from the ground.
But as reserves and future cash flows evaporate, so has Exxon’s long-held reputation as the industry’s most efficient cash generator. The explorer’s return on capital plummeted to less than a nickel on the dollar last year from 36 percent as recently as 2008, according to data compiled by Bloomberg. The writing was on the wall in April when S&P Global Inc. stripped Exxon of the platinum credit rating it had held since the Great Depression.
“In our view, the company’s greatest business challenge is replacing its ongoing production,” the credit-rating company said at the time.
To that end, Exxon has fast-tracked development of the 1.5 billion-barrel Liza discovery 120 miles (193 kilometers) off Guyana’s shores. The company plans to formally greenlight the investment by the end of this year. Guyana President David Granger last month said it may begin pumping crude as soon as 2019. That would be breakneck speed for an industry that often takes as long as a decade to bring deepwater finds online.
As impressive as the Guyana discovery is, it won’t be enough on its own to rejuvenate Exxon’s portfolio, said Pavel Molchanov of Raymond James Financial Inc., one of just seven analysts who rate Exxon’s stock the equivalent of a “sell."
“It’s a good-sized deepwater project but nothing extraordinary,” Molchanov said. “If this was in Angola, the Gulf of Mexico or Norway, people wouldn’t be talking about it. It’s interesting only because Guyana is a brand-new frontier” oil region.
On its home turf, Exxon agreed last month to shell out as much as $6.6 billion in an acquisition that will more than double the company’s footprint in the Permian Basin, the most-prolific U.S. oil field.
In its biggest transaction in 6 1/2 years, Exxon agreed to spend $5.6 billion in shares, plus a series of contingent cash payments totaling as much as $1 billion over the next 15 years, on rights to Permian’s Delaware region. After acquiring the assets from the Bass family -- legendary Texas wildcatters -- Exxon plans to deploy 15 drilling rigs to expedite development.
When the transaction closes, Exxon’s Permian resource base will reach the equivalent of 6 billion barrels of crude, an asset that’s worth $324 billion at current oil prices. Wells drilled in the acquired area will generate “attractive returns” even if crude drops back down to $40 a barrel, Exxon said when the deal was announced on Jan. 17. West Texas Intermediate crude, the U.S. benchmark, has averaged about $50 for the past six months.
The three Bass tracts Exxon is buying will provide at least 20 years of drilling, according to the company.
To be sure, Woods hasn’t entirely abandoned the quest for bonanzas on the other side of the world. Just last week, Exxon completed a takeover of Papua New Guinea natural gas driller InterOil Corp. that may cost the U.S. company as much as $3.9 billion. The deal, launched six months before Woods’ ascension, will provide Exxon with additional sources of natural gas for a liquefaction and export facility it opened in the South Pacific nation in 2014.
“The challenge for Exxon is its size,” Youngberg said. “To make an acquisition that is any way material, they have to pursue something pretty big. And things of that size are hard to come by.”