In writing off a couple of billion dollars of difficult-to-tap Rocky Mountain gas holdings, ExxonMobil this morning is diverting attention from key bigger-picture truths.
More write-downs loom, and will probably come sooner than later, including on the company’s 4.6 billion barrels of sand-locked oil in Canada. We expect that particular chunk of the ExxonMobil stranded-asset portfolio to be formally acknowledged as such when the company releases its full 2016 earnings report in a few weeks.
What ExxonMobil did reveal this morning is perhaps bad news enough—revenues down, profits down, payments to shareholders down, debt up, and cash scarce.
The world’s largest oil company remains on a trajectory of shrinkage, in other words, continuing to log the sorts of losses that have characterized the oil industry as a whole for the past several years. Major investors in the oil-sands space, especially, have registered dour expectations, one recently referring to it as a “setting sun” sector.
What ExxonMobil and its peers need desperately and above all is for oil prices to rise to levels that are unlikely to materialize anytime soon.
This despite President Trump reopening the XL pipeline project and despite other fossil-fuel interests hastening to build more pipelines in the U.S. These are fools’ moves, as demand for pipeline capacity diminishes and as such projects promise far more risk than reward.
Once ExxonMobil writes off its Canadian oil-sands assets it will have closed the books on one of CEO Rex TiIllerson’s larger set of acquisitions, which is a storyline emblematic of his performance during a decade at the helm. It was on his watch, after all, that company revenue plummeted, costs increased, cash flow disappeared, cash to shareholders fell through the floor and Exxon became ensnared in a climate-change controversy that will take decades to repair. As we said a while back, shareholders can be forgiven for breathing a sigh of relief that Tillerson is gone.
IEEFA has maintained since October 2014—and continues to maintain—that the cumulative risks surrounding the oil industry —price volatility, rising cost of production, climate change and public opposition to industry expansion—will continue to weigh heavily on companies like ExxonMobil.
Market forces trump pro-fossil-fuel rhetoric. They trump regulatory maneuvers. And they trump whatever symbolic value there is in putting a failed oilman in charge of U.S. foreign policy.
The new administration is going to waste a lot time and resources trying to prop up the fossil fuel industry but investment returns in all likelihood will remain elusive.
Tom Sanzillo is IEEFA’s director of finance.
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