Speaker 1: Hi, I'm Carol Masser and I'm Jason Kelly. It's time
Speaker 1: for the cover story. Well, perhaps no company has been
Speaker 1: as profoundly humbled by recent events as Exxon. It's the
Speaker 1: west largest oil producer by market value, along one of
Speaker 1: the world's most valuable companies. Exxon was sinking into mediocrity
Speaker 1: even before the world was suddenly awash in cheap oil.
Speaker 1: Who would have thought we would have been talking about
Speaker 1: XN in this way. Maybe go back ten years or
Speaker 1: twenty years. It's really mind boggling. And what's interesting, though, Jason,
Speaker 1: is that the coronavirus has ultimately laid bare a decade's
Speaker 1: worth of miscalculations by the company, whether it's shale oil
Speaker 1: to Canadian oil sands and even a mega deal in Russia.
Speaker 1: I mean, Excen has spent so much money on projects
Speaker 1: then now it even has to borrow to cover its
Speaker 1: dividend payments. And when it comes to energy companies, as
Speaker 1: an investor, you expect those dividend payments. Well, and the
Speaker 1: numbers they don't lie, Carol, Xon needs a break even
Speaker 1: price of sixty dollars a barrel for that's five dollars
Speaker 1: more than VP and ten dollars more than Shell and Chevron,
Speaker 1: and maybe you've noticed oil is way way cheaper than
Speaker 1: that right now. And for a little more perspective on Exxon,
Speaker 1: once the undisputed king of Wall Street, X on today
Speaker 1: is worth less than Home Depot, which Jason has less
Speaker 1: than half its revenue. Check out the cover story The
Speaker 1: Humbling of Exxon. A decade of miscalculation turned a juggernaut
Speaker 1: into just another middling company. And that was before the pandemic,
Speaker 1: by Kevin Crowley and Brian Gruley. Darren Woods, chief executive
Speaker 1: officer of Exxon Mobile, was chipper as he bandied with
Speaker 1: industry analysts on January thirty one about his company's poor performance.
Speaker 1: The coronavirus had yet to spread far beyond China, but
Speaker 1: Woods had prepared to say a few words about it
Speaker 1: if anyone asked. No one did. As for the lower
Speaker 1: earnings and sliding share price, Woods assured his conference call
Speaker 1: audience that things were under control. Oil prices languishing in
Speaker 1: the sixty dollar a barrel range weren't a problem but
Speaker 1: an opportunity. We know demand will continue to grow, driven
Speaker 1: by rising population, economic growth, and higher standards of living,
Speaker 1: Wood said, we believe strongly that investing in the trough
Speaker 1: of this cycle has some real advantages. He went on
Speaker 1: to describe how Exxon would spend in excess of thirty
Speaker 1: billion dollars on exploration and other projects in more than
Speaker 1: any other Western oil company. While we would prefer higher
Speaker 1: prices and margins, he said, we don't want to waste
Speaker 1: the opportunity this low price environment provides. Over the next
Speaker 1: several weeks, COVID nineteen ravaged the oil industry by vaporizing
Speaker 1: global demand. Just as Russia and Saudi Arabia launched a
Speaker 1: price war. Investors were stunned to see oil fall to
Speaker 1: an eighteen year low of twenty two dollars and seventy
Speaker 1: four cents of barrel at the end of March. An
Speaker 1: agreement aimed at cutting output and boosting prices failed to
Speaker 1: halt the slide, and on April twenty some oil contracts
Speaker 1: were trading for less than zerollers were paying buyers to
Speaker 1: take the crude. The fallout for producers large and small
Speaker 1: has been devastating. You're seeing fragilities exposed, says Kenneth Medlock,
Speaker 1: the third Senior Director of the Center over Energy Studies
Speaker 1: at RICE, University's Baker Institute for Public Policy COVID nineteen
Speaker 1: is doing things that nobody could have imagined. Perhaps no
Speaker 1: company has been humbled as profoundly by recent events as Exxon,
Speaker 1: the West's largest oil producer by market value and an
Speaker 1: industry paragon that sets the bar not just for itself
Speaker 1: but for its competitors, And the pandemic isn't primarily to blame.
Speaker 1: The culprit is just as much the company itself. The
Speaker 1: coronavirus has laid bare a decade's worth of miscalculations. XN
Speaker 1: missed the wild and lucrative early days of shale oil.
Speaker 1: An adventure in the oil sands of Canada swallowed billions
Speaker 1: of dollars with little to show for it. Political tensions
Speaker 1: doomed a mega deal in Russia. Exson ended up spending
Speaker 1: so much on projects that it has to borrow to
Speaker 1: come for dividend payments. Over a ten year period, Exon
Speaker 1: stock has declined ten point eight percent on a total
Speaker 1: return basis, which includes dividends. The company's major rivals all
Speaker 1: posted positive returns in that period, except for BP, which
Speaker 1: had the deepwater horizons built in the Gulf of Mexico
Speaker 1: In the wider s and P five hundred index has
Speaker 1: returned nearly two The oil business is all about how
Speaker 1: much you produce, how low you get your costs, and
Speaker 1: how well you capture resources for the future. Exon produces
Speaker 1: about four million barrels a day, essentially the same as
Speaker 1: ten years ago, despite repeated vows to push the number higher. Meanwhile,
Speaker 1: the company's debt has risen from effectively zero to fifty
Speaker 1: billion dollars, and its profit last year was a bit
Speaker 1: more than half what it was a decade ago. Once
Speaker 1: the undisputed king of Wall Street, XN today is worth
Speaker 1: less than Home Depot, which has less than half the revenue.
Speaker 1: Former CEO Rex Tillerson oversaw that eventful span before leaving
Speaker 1: to become President Trump's Secretary of State. Under Tillerson, Woods
Speaker 1: ran Exn's then successful refining business. The rangey, white haired
Speaker 1: graduate of Texas A and M University is known for
Speaker 1: his unfailing optimism and affability. Woods declined to be interviewed
Speaker 1: for this article. The size of the job he has
Speaker 1: now is difficult to overstate. In an unprecedented crisis, He's
Speaker 1: guiding what author Steve call in his book Private Empire
Speaker 1: Exxon Mobile and American power, called a corporate state within
Speaker 1: the American state, one of the most powerful businesses ever
Speaker 1: produced by American capitalism. For four decades, Exxon has plowed ahead,
Speaker 1: eyes on the distant horizon, keeping its financial returns healthy,
Speaker 1: share price steady, and dividend rising through wars and recessions,
Speaker 1: Democratic administrations and Republican Now the world will see how
Speaker 1: well Exon can survive a pandemic and whether it has
Speaker 1: what it takes to thrive in the aftermath. On January thirty,
Speaker 1: two thousand and nine, Exxon reported a profit of forty
Speaker 1: five point two billion dollars for two thousand and eight.
Speaker 1: At that time, the biggest annual profit ever recorded by
Speaker 1: a public U S company. Revenue was four hundred and
Speaker 1: twenty five billion dollars. The stock closed that day at
Speaker 1: seventy six dollars, and Exxon pumped more oil than any
Speaker 1: OPEC member except Saudi Arabia and Iran. Tillerson had been
Speaker 1: CEO for three years, a gruff Texan who had risen
Speaker 1: through Exon's rough and tumble drilling and exploration businesses. He
Speaker 1: was about to make his biggest deal to date, the
Speaker 1: thirty one billion dollar acquisition of x t O Energy,
Speaker 1: the largest independent U S producer of natural gas. The
Speaker 1: deal was bold, not just because of the price, but
Speaker 1: also because in buying x t O, Exxon was tacitly
Speaker 1: acknowledging that concerns over greenhouse gases would spur demand for
Speaker 1: cleaner gas. The purchase surprised some investors, who couldn't easily
Speaker 1: see how the company would make a return. This wasn't
Speaker 1: like Exxon, known for an iron discipline about cutting deals
Speaker 1: that offered clear, reliable payoffs. Tillerson told analysts, will probably
Speaker 1: suffer in the near term. As we put it together,
Speaker 1: this is really about value creation. Over the next many years,
Speaker 1: x t o s expertise was in extracting gas from
Speaker 1: subterranean rock using newly developed fracturing techniques. But as Exxon
Speaker 1: assimilated the company, wildcatters such as Harold Ham of Continental
Speaker 1: Resources and Scott Sheffield of Pioneer Natural Resources were discovering
Speaker 1: that fracking worked for oil. Too Soon, it became clear
Speaker 1: that the real riches in North Dakota and West Texas
Speaker 1: shale were in oil, because crude was rising in price
Speaker 1: while gas was plummeting. As the decade wore on the
Speaker 1: magnitude of oil accessible in US shale would make the
Speaker 1: country an energy superpower to rival OPEC. Yet it would
Speaker 1: be years before Exon would embrace shale oil. I would
Speaker 1: be less than honest if I were to say to
Speaker 1: you we aw at all coming, because we did not quite, frankly,
Speaker 1: Tillerson said at event at the Council on Foreign Relations.
Speaker 1: Later in nine he told the Houston Industry Conference that
Speaker 1: he probably paid too much for XDO a rare Exxon
Speaker 1: maya culpa. Tillerson didn't respond to requests for comment for
Speaker 1: this article. Exxon wasn't the only energy giant to whiff
Speaker 1: early on in the oil shell boom. So did Chevron, Royal,
Speaker 1: Dutch Shell, and BP. That's partly because the business was
Speaker 1: undergoing a fundamental change that the super majors weren't eager
Speaker 1: to accept. For decades, politicians and consumers were paranoid about
Speaker 1: running short of oil and gas. The biggest companies, led
Speaker 1: by Exxon, spent great sums exploring and drilling in evermore
Speaker 1: exotic and forbidding geographies seeking the next mother load. Shale
Speaker 1: changed the calculus. Nobody doubted anymore that there were oceans
Speaker 1: of oil in the ground, it was a matter of
Speaker 1: getting it out as inexpensively as you hood. The Hams
Speaker 1: and Sheffields, fueled by cheap money from Wall Street, were
Speaker 1: driving down extraction costs and ramping up production in old
Speaker 1: American oil fields that the big boys had long ago abandoned.
Speaker 1: Some of them were a short drive from exn's Irving,
Speaker 1: Texas headquarters. Exxon, meanwhile, was taking chances on far away lands.
Speaker 1: Consider Western Canada, where Exon invested in the Curl Oil
Speaker 1: Sands project. If you believed the world was short of crude,
Speaker 1: it sounded great. Millions and millions of barrels were waiting
Speaker 1: to be squeezed from Alberta sand, and Exxon had the
Speaker 1: technical prowess to plumb them. But upfront costs ran eighteen
Speaker 1: percent higher than expected, and in twenty fourteen, oil prices
Speaker 1: began a nearly two year swoon as OPEC flooded the
Speaker 1: world with oil in the hope of suffocating American shale drillers.
Speaker 1: With crew dipping below forty dollars a barrel. Exn's hand
Speaker 1: was forced in early seventeen, after investing more than sixteen
Speaker 1: billion dollars, the company had to erase three point billion
Speaker 1: barrels from its listing of crude reserves, most of it
Speaker 1: from Alberta. The company couldn't control oil prices, of course,
Speaker 1: but the oil sands right off was nevertheless part of
Speaker 1: the deepest reserves cut in Exn's modern history. Exon last
Speaker 1: year rebooked some of the Alberta reserves. Russia seemed more
Speaker 1: of a sure thing. President Vladimir Putin and Tillerson had
Speaker 1: a history. In two thousand three, under then CEO Lee Raymond,
Speaker 1: Exxon had come close to buying into Ukos Oil, the
Speaker 1: Russian oil producer owned by putin adversary Mikhail Hrodrokowski. Putent
Speaker 1: balked at the prospect of Exon calling the shots on
Speaker 1: production and other matters. Tillerson, then an Exon senior vice president,
Speaker 1: was just as wary of Putin meddling with Yukos. He
Speaker 1: helped persuade Raymond to back off, which forged a bond
Speaker 1: between Putin and Tillerson that no other Western oil company
Speaker 1: executive enjoyed. In eleven, Putin and Tillerson agreed on the
Speaker 1: first piece of what was envisioned as a three d
Speaker 1: billion dollar exploration to that opened vast tracks of the
Speaker 1: Russian Arctic thought to contain billions of barrels of oil.
Speaker 1: It was an ideal match. Exon wanted the natural resources, putin,
Speaker 1: the expertise, and money. Then in fourteen, the Obama administration
Speaker 1: imposed sanctions on Russia for its annexation of Crimea. The
Speaker 1: sanctions prevented Exxon from continuing work on most of the
Speaker 1: Russian project. Another big fish had gotten away again. Exxon
Speaker 1: probably couldn't have predicted Crimea, nor was it alone in
Speaker 1: seeking access to Russian crude, but maybe that's what you
Speaker 1: get for trusting putin. By the time Tillerson departed to
Speaker 1: join the Trump administration, Exon looked a lot different than
Speaker 1: it did when it reported those record earnings. Revenue and
Speaker 1: profit were a fraction of what they'd been, and the
Speaker 1: stock had lost its premium to other SMPI Index energy
Speaker 1: companies for the first time since worse for the first
Speaker 1: time since the Great Depression. Standard and Poor's had stripped
Speaker 1: Exon of its top credit rating, and the company faced
Speaker 1: a New York state lawsuit alleging that it had intentionally
Speaker 1: misled investors about the dangers of climate change. The company
Speaker 1: won the case in December twenty nineteen. When Woods became
Speaker 1: CEO in January twenty seventeen, there were the predictable media
Speaker 1: stories about him stepping out of Tillerson's shadow. That wasn't
Speaker 1: going to be easy, given the big right off, the
Speaker 1: S and P downgrade, and the other unfortunate circumstances he inherited.
Speaker 1: But Woods was determined to rebuild Exxon with projects in Brazil, Guiana, Mozambique,
Speaker 1: and Papua New Guinea, the sorts of efforts that for
Speaker 1: some shareholders conjured unpleasant memories of Canada and Russia. Exxon
Speaker 1: had also finally jumped into shale oil with a six
Speaker 1: billion dollar acquisition of acreage negotiated by Tillerson in West
Speaker 1: Texas's prodigious Permian basin. Other super majors weren't as eager
Speaker 1: to embark on new endeavors like Exxon. They'd spent heavily
Speaker 1: then paid for it. During the twenty fourteen twenty sixteen crash,
Speaker 1: Burned investors were cooling on energy stocks and diverting their
Speaker 1: money into tech, pharma and other sectors. Energy now makes
Speaker 1: up less than three percent of the SMP five hundred,
Speaker 1: compared with more than ten percent In two thousand nine,
Speaker 1: the growing movement to transition away from fossil fuels to solar,
Speaker 1: wind and other energy sources was also peeling away investment,
Speaker 1: such as the clamor in Europe that Royal, Dutch Shell
Speaker 1: and BP have both pledged to become carbon neutral by
Speaker 1: twenty fifty and invest heavily in renewable energy sources. Exxon
Speaker 1: has made no such pledge, instead investing in early stage
Speaker 1: green technologies, while insisting that the world will need more
Speaker 1: and more oil and gas until at least twenty forty,
Speaker 1: driven by China and India. Some on wall streets he
Speaker 1: demand peaking as early as twenty thirty. At his first
Speaker 1: annual investor Day in March seventeen, Wood's vowed to spend
Speaker 1: more on new ventures so Exxon would be ready when
Speaker 1: the market turned. We are confident, he declared before dozens
Speaker 1: of analysts and shareholders in New York. Our job is
Speaker 1: to compete and succeed in any market, irrespective of conditions
Speaker 1: or price. Even then, a lot of institutional investors were
Speaker 1: inclined to take an ex and CEO's word as gospel.
Speaker 1: But an odd turning point came a year into Woods's tenure.
Speaker 1: Wall Street analysts threw a little tantrum about the lack
Speaker 1: of forward looking data in Exn's quarterly reports. They were
Speaker 1: growing weary of sunny promises belied by a lackluster share price.
Speaker 1: With the company planning to spend so much money on
Speaker 1: stuff its rival saw a little need for the Analysts
Speaker 1: zeroed in on why Exon CEO never appeared on quarterly
Speaker 1: conference calls to answer their questions as the top bosses
Speaker 1: at almost every other SMP five company. Did we think
Speaker 1: times have changed and that Exxon may not necessarily be
Speaker 1: able to expect the market will continue to offer it
Speaker 1: the benefit of the doubt, a Barclay's analyst wrote in
Speaker 1: a February investor note. In other words, Exxon was no
Speaker 1: longer a special case. Two months later, Jeff woodbur then
Speaker 1: Exxon's investor relations vice president, promised that Woods would soon
Speaker 1: start participating in conference calls, saying, we believe that the
Speaker 1: investment community did not have a very good understanding of
Speaker 1: what our value growth potential was. Good morning, everyone, Wood said.
Speaker 1: When he stepped on stage at Exon's most recent investor
Speaker 1: day on March five in New York, he waited for
Speaker 1: a response. When none came, he said, good morning everyone,
Speaker 1: Still nothing, come on now, Wood said, a little bit
Speaker 1: of energy here. Nervous titters rippled through the audience. On
Speaker 1: that Thursday, the coronavirus had only begun to wreak havoc
Speaker 1: with America's health and economic well being. Social distancing wasn't
Speaker 1: yet happening widely, though. Guests that the Exxon presentation were
Speaker 1: offered small bottles of hand sanitizer. Woods mentioned the virus
Speaker 1: as part of a very challenging short term margin environment
Speaker 1: facing XN. It was a new twist on a familiar speel.
Speaker 1: Investors could have heard Tillerson spending years before the longer
Speaker 1: term horizon is clear, and today our focus is on
Speaker 1: that horizon. Wood said Exxon was, for the most part,
Speaker 1: sticking with its plan. Wood said he intended to pair
Speaker 1: spending barely six percent to a maximum of thirty three
Speaker 1: billion dollars for the year, and emphasized the company's optionality,
Speaker 1: a word he uses a lot to adjust spending to
Speaker 1: react to market conditions while others retrench. Wood said, we
Speaker 1: believe the best time to invest in these businesses is
Speaker 1: during a low, which will lead to greater value capture.
Speaker 1: In the coming up swing. You can do that if
Speaker 1: you have the opportunities and the financial capacity, which we do.
Speaker 1: This is a key competitive advantage of ours. Within forty
Speaker 1: eight hours, Woods plan was in trouble. The Russians and
Speaker 1: Saudi's unable to agree on how much crew to pump,
Speaker 1: started pushing oil prices down. At the same time, demand
Speaker 1: was spiraling lower as lockdowns proliferated around the world. Storage
Speaker 1: tanks and pipelines were overwhelmed with unwanted oil. Refineries reduced
Speaker 1: their inflows of raw crude. High cost wells were shut.
Speaker 1: Analyst Paul Sankey of Missouo Securities USA observed in an
Speaker 1: investor note that Exson was stepping up when the industry
Speaker 1: was stepping back. Turns out they were stepping off a cliff.
Speaker 1: On March six, SMP again downgraded xn's credit rating to
Speaker 1: A A from a A plus and said it could
Speaker 1: happen again if the company does not take adequate steps
Speaker 1: to improve cash flows and leverage. A week later, the
Speaker 1: stock closed at thirty one forty five cents, the lowest
Speaker 1: since two thousand two. Investors started to wonder whether Exon
Speaker 1: might end its string of thirty seven straight yearly increases
Speaker 1: in its dividend. To cover that fourteen point seven billion
Speaker 1: dollar payment, the third highest among SMP five companies. Along
Speaker 1: with its aggressive capital spending, Exon needed crude to fetch
Speaker 1: about seventy seven dollars a barrel, the highest break even
Speaker 1: among oil majors, according to our BC Capital Markets. The
Speaker 1: stock began to recover in early April, but it was
Speaker 1: all too much. On April seven, Would said Exxon would
Speaker 1: cut capital spending to twenty three billion dollars a drop
Speaker 1: of an additional ten billion dollars or thirty and shave
Speaker 1: operating expenses by the bulk of the cuts would be
Speaker 1: aimed at the Permian. Exxon would defer some activities in
Speaker 1: its Guiana project while postponing investment decisions elsewhere. They cried Uncle,
Speaker 1: says Rice University's Medlock. With the cuts, the break even
Speaker 1: dropped to sixty dollars a barrel, still tops among the
Speaker 1: biggest companies. You could almost feel Woods gritting his teeth
Speaker 1: in the company's statement that day. The long term fundamentals
Speaker 1: that underpinned the company's business plans have not changed. Population
Speaker 1: and energy demand will grow, and the economy will rebound.
Speaker 1: Despite the cuts, Exxon still expected Permian production would rise.
Speaker 1: In other words, the company wasn't abandoning its strategy, it
Speaker 1: was just hit pause in deference to COVID nineteen. Woods
Speaker 1: certainly can't be faulted for not foreseeing the recent oil carnage,
Speaker 1: with the industry abandoning fracking and laying off more than
Speaker 1: fifty thousand workers in March alone, and Exxon isn't seeking
Speaker 1: government intervention to help save you as shale oil as
Speaker 1: ham Sheffield and others are. With as many as one
Speaker 1: in three shale players expected to exit the market one
Speaker 1: way or another, Exxon could be in a position to
Speaker 1: snap up cheap acreage after the virus retreats. The large
Speaker 1: companies might actually get bigger on the back of this,
Speaker 1: Medlock says. For now, though, it's hard not to see
Speaker 1: Exxon as just another company getting tossed around by the market.
Speaker 1: After the recent investor day, a reporter asked Woods of
Speaker 1: Exon was still capable of navigating today's up and down
Speaker 1: and down some more energy business. I don't think you
Speaker 1: stay in business for one thirty five years, Wood said,
Speaker 1: without being attentive to the needs of your customers, your stakeholders,
Speaker 1: and the communities that you operate in. It wasn't actually
Speaker 1: an answer.