April 8, 2020 Read More →

Exxon’s crisis strategy ignores core weaknesses

S&P Global Market Intelligence ($):

Exxon Mobil Corp.’s plan to cut 2020 capital spending by a deeper-than-expected $10 billion, along with other cost-cutting measures, may help offset some of the pain from one of the biggest oil price crashes in history. However, analysts said the major and its peers may not be able to avoid longer-term fallout should prices remain depressed.

“These measures may help the majors through the current patch of oil price weakness, just as they did in 2015-2016, although a sustained downturn in crude [prices] would represent a greater challenge,” AJ Bell investment director Russ Mould said in an April 7 email.

Exxon — the United States’ largest publicly traded energy company — was one of the last oil majors to announce a capex cut, disclosing it will slash its budget for the year to approximately $23 billion, down 30% from a previously announced $33 billion. The company also said it plans to trim operating expenses by 15% this year, after it signed a deal March 17 to raise $8.5 billion in new debt in response to falling prices.

“Cutting capex, selling assets and raising debt are all short-term fixes but they cannot be used for a long period of time, as all three can compromise the long-term competitive position of a company and its ability to invest in its core offering,” Mould said..

In the last month, equity and commodity markets have been hammered by the coronavirus pandemic, which has sapped demand at a time when supply is overflowing. West Texas Intermediate and Brent crude oil prices have fallen more than 50% year-to-date, and the downturn has upended spending plans of oil companies across the supply chain, prompting many to conserve cash to fund operations and dividends and to minimize exposure to what many warn could be a lower-for-longer price environment.

[Amanda Luhavalja]

More: Capex cuts, new debt are ‘short-term fixes’ for Exxon and peers, analysts say

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