April 20, 2017 Read More →

IEEFA Update: Exxon Sends Investors Down a Russian Rabbit Hole

Well-Timed Ploy to Divert Attention From Balance-Sheet Rot Eating Away at World’s Biggest Oil Company; Public Relations Plum for Putin; Another Blow to Shareholders

News comes today that ExxonMobil is applying for a U.S. government waiver on sanctions against the Kremlin that are keeping the company from developing new oil reserves in Russia.

The sanctions in question, imposed in response to Russia’s annexation of Crimea in 2014, specifically forbid U.S. corporate deals with Rosneft and specifically named the head of the company as a dangerously influential loyalist of  Vladimir Putin’s.

And the reserves in questions amount to a reported 100 million barrels of oil that would require a partnership investment between Russia and Exxon of perhaps as much as $500 billion to extract. Exxon has already squandered (pre-sanctions) $1 billion in investor money on the partnership, which—make no mistake—promises to lose money if it were somehow allowed to proceed.

To be sure, there is shrewd method to Exxon’s latest madness.

In the very short term, on April 28, the company has a quarterly earnings call on which eager stock analysts will more than likely take the bait on Exxon-Rosneft and use their allotted time to go down the rabbit hole. What better way to deflect another shoddy quarter of performance?

Expect the company to want the script to focus instead on breathless speculation around the U.S. government response to the sanctions-waiver request and the implications of doing business with Putin rather than to zero in responsibly on the fact that $55-per-barrel oil years will continue to hinder profits and shareholder payments for the next few years at least.

Analysts may also forget to ask about a recent Exxon investor-relations presentation in which company executives reversed course on decades of business strategy that emphasized reserves over cash and adopted a quick-buck scheme to raise money by coming late to the natural gas markets.

The Exxon/Rosneft chatter may very well serve also to push aside any discussion of the company’s recent write-off of 3.5 billion barrels of oil sands reserves but that is has not yet acknowledged that—as a result—the company is worth about $22 billion less than its reported value. And to rule out any clarification about the loss of $2 billion in Rocky Mountain gas investments and the implications for the rest of the company’s holdings in that realm.

AS EXCITEMENT CHURNS AROUND THIS HIGHLY SPECULATIVE EXXON RUSSIAN PROJECT, Vladimir Putin is the investor who fares best, in the short term anyway.

He gets to reunite with an old corporate friend and spin a fun yarn about the fossil-fuel future of Russia, a strategy that can only help boost the country’s fiscal fortunes and the asset valuation that support the rickety Russian economy. Russia continues to borrow aggressively in the public bond markets to replace oil dollars lost to the lingering low-price environment, and the new Exxon/Rosneft narrative aims in part to sustain this thin strategy.

It’s also meant to help, more bluntly, Putin hold his political grip on Russia.

All that aside, what remains largely overlooked in most of the telling of the story is that Exxon wants to drill more during a period of worldwide oversupply and low prices. There is no market signal calling for this addition to supply and there is no reason for the U.S. government to stand aside and let it happen.

The Exxon/Rosneft item is a gimmick meant mainly to divert attention from the declining financial performance of Exxon.

Tom Sanzillo is IEEFA’s director of finance.


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