Exxon faces $20 billion hit from ‘epic failure’ of a decade ago

But as we speak the world has a glut of pure fuel as a result of shale increase that unlocked huge quantities of fossil fuels within the United States.

Exxon’s “colossal gas asset impairment” is administration’s “clearest acknowledgement to date that the XTO deal was an epic failure — not that any reminders of this are needed,” Raymond James analyst Pavel Molchanov wrote in a word to shoppers Tuesday.

The bulk of the writedown covers properties in Appalachia, the Rockies, Texas, Oklahoma, Louisiana and Arkansas that had been acquired within the XTO deal. The relaxation of the cost is for abroad fuel properties in western Canada and Argentina.

But not solely is Exxon slashing the worth of its pure fuel portfolio, the corporate has utterly eliminated some of these fuel properties from its improvement plan. Exxon stated in a assertion that it could promote some of these belongings, “contingent on buyer valuations.”

Shrinking the finances

Instead of plowing more cash into pure fuel, Exxon is promising traders it is going to “prioritize near-term capital spending on advantaged assets with the highest potential future value.”

Specifically, Exxon stated it is going to concentrate on growing its huge oil assets in Guyana, accelerating manufacturing within the Permian Basin of West Texas and a few exploration in Brazil.

‘Precarious place’

Wall Street is hoping the belt-tightening and a extra conservative finances will likely be sufficient to save lots of Exxon’s dividend, which is crucial to its attraction to traders. But analysts are skeptical. This 12 months marks the primary time since 1982 that Exxon failed to extend its dividend.

Molchanov, the Raymond James analyst, warns that “Exxon cannot fund its dividend in 2021” with out extra borrowing or asset gross sales.

For now, the capital markets are vast open and Exxon ought to be capable to borrow to fund the dividend. But that may’t final ceaselessly.

“It’s a question of how much debt they want to take on,” stated RBC Capital Markets analyst Biraj Borkhataria. “The dividend looks challenged.”

And even when Exxon avoids a dividend discount, its sharp spending cuts increase questions concerning the firm’s long-term future.

Oil corporations want to repeatedly plow cash into drilling — in any other case manufacturing dries up, hurting money flows.

“The company is in a precarious position because of the deals they’ve done and the fact they’ve underspent for many years,” stated Borkhataria. “They have to execute on their existing projects to protect the long-term viability of the business.”