Testing Times for Exxon
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Testing Times for Exxon |
August 2017Casey Sattler
Exxon Mobil has long been in a league of its own. The fourth-largest firm in the latest annual Fortune 500 list of US corporations had revenues in 2016 -- a relatively weak year for oil prices -- that would have placed it 45th, between Bangladesh and Portugal, in the ranking of countries by GDP. Its celebrated management focus on discipline and efficiency is a real-world manifestation of business school textbook best practices. But the US oil giant has recently seen an erosion of its standing on a number of fronts, from its financial performance to its ability to control public messaging around its internal affairs, and even extending to its supposed clout in Washington. Over the years, Exxon's size, global reach and unmatched legal prowess have allowed it to operate as a virtual nation state, its letter-of-the-law approach allowing it to deftly navigate the challenges posed by political risk and sanctions in different jurisdictions, while at the same time being sought out for advice by political leaders, as former CEO -- and now US Secretary of State -- Rex Tillerson was by then US President Barack Obama in the wake of the 2010 Macondo disaster in the Gulf of Mexico. All this counted for nothing, however, when the company was fined $2 million last month for violating US sanctions imposed on Russia. The US Treasury Department concluded that Exxon showed "reckless disregard" by having Rosneft boss Igor Sechin, a target of sanctions, as signatory on eight agreements with the Russian state oil giant in 2014. The fine is minuscule in the context of Exxon's earnings or market capitalization, but carries great symbolic significance, and is being vigorously contested by the Exxon leadership. The firm sees fighting the penalty as a matter of principle -- it contends that US sanctions only target Sechin's personal dealings and not his role as CEO of Rosneft -- as well as a necessary move to prevent the opening of a Pandora's box of additional sanctions liabilities. Exxon has a lot on the line in Russia. Its sweeping joint venture with Rosneft, which has been sidelined by sanctions, represents a major bet for the US supermajor and a strategic counterweight to its exposure to US gas and high-cost oil sands, deepwater and LNG. At the same time, public opinion around Exxon has soured. The supermajor, much like the rest of the oil industry, has enjoyed little in the way of public affection over the years, but was still ranked as the 18th most admired firm globally a decade ago by Fortune magazine. This year, it's down in 40th place. This partly reflects broader negative sentiment around the oil sector as a result of campaigns such as the "Keep It in the Ground" movement, which claims oil companies are ignoring the threat of climate change for short-term corporate gain. But there is also an Exxon-specific element to the backlash, with the company under investigation by the New York state attorney general's office for allegedly misleading investors about the risks of climate change. Exxon denies these accusations, and has suggested that the investigation is driven by "politics and publicity, not law enforcement." But the company has also been striking a different tone under new CEO Darren Woods, with early public messages lending support to proposals for a US carbon tax and generally taking a more cooperative line on the battle against climate change. Too Little, Too Late But at this late stage, such statements come across as merely self-serving, rather than sincere. Exxon spent years arguing that it was not its role to endorse specific policies before it finally began actively lobbying Washington for a carbon tax. There was no hesitation, however, when it came to lobbying lawmakers against strengthening sanctions against Moscow. Perhaps the most surprising of Exxon's woes is its weakened financial leadership on the back of a lackluster upstream performance, underlined by last week's second-quarter earnings announcement, which showed oil and gas production dropping by 5.5% quarter-on-quarter. Investors granted Exxon significantly more leeway than its peers with regard to operational disclosure when it was consistently outperforming other majors on shareholder returns. But investors are starting to lose patience now that the company has ceded leadership on metrics like returns on capital employed and reserves replacement, faced investigation for its lack of financial write-downs after oil and gas prices collapsed, and has had its safety performance scrutinized following explosions at two US refineries. Capturing a broader sentiment among Exxon-watchers, Raymond James analyst Pavel Molchanov notes that Woods has so far been an effective communicator of the company’s longer-term strategy, but his efforts are "hamstrung by his predecessor's mistakes and the market's increasingly skeptical sentiment on the stock." The largest such mistake was the ill-timed $36 billion acquisition of XTO Energy in mid-2010, which saddled Exxon with a massive US gas reserves and production base just as prices were settling around a much lower "new normal" of around $3 per million Btu. The firm has recently added low-cost resources in US tight oil and Mozambique and Papua New Guinea gas, and has enjoyed exploration success offshore Guyana, but analysts are concerned about whether this progress is sufficient. All of this is not to suggest that Exxon is on the cusp of a major crisis. The supermajor remains a leader in areas like project management and cost discipline, and its steadfast commitment to the vertically integrated business model has proven wise during the oil price downturn. But Woods faces an uphill slog to convince various stakeholders that he isn't doing too little, too late to address some long-standing issues that are now threatening to dominate the narrative around the company. With investors in wait-and-see mode on the operational front, and Exxon not getting the benefit of the doubt in the public and political spheres, the new CEO may have to start being more transparent than his predecessors. "Trust us" is no longer going to work. Casey Sattler is editor of Petroleum Intelligence Weekly. |
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