Exxon Mobil’s existential crisis

The shrimpers of Louisiana will be some time recovering from the Gulf of Mexico oil spill, even though BP has finally declared the Macondo well dead. But, contrary to expectations, the spill has turned out to be a catastrophe neither for the company, nor the industry as a whole. As the Financial Times’ Ed Crooks reports, the 152-day-long crisis is but “a bump in the road” for the industry. So my question is, why is Exxon Mobil in trouble?

Consider Exxon CEO Rex Tillerson, who, like his predecessors going back to John D. Rockefeller 150 years ago, has inspired fear among rivals and those merely observing the company; most industry analysts and journalists routinely offer Exxon kid glove treatment in order to avoid its wrath should they diss it. Yet people who wouldn’t ordinarily do so are starting to diss the company.

Just last week, Paul Sankey, a Deutsche Bank oil analyst who for some 18 months has been probably Wall Street’s loudest cheerleader for a company he calls The Big Unit, downgraded Exxon shares from “buy” to “hold.” Sankey is one of the best analysts on the Street, and Steve Gelsi of Marketwatch has blamed his assessment for a new slide in Exxon’s share price. Sankey was followed the next day by a similar call by Jacques Rousseau at RBC Capital.

We may not need to get out the Kleenex, but Exxon is nevertheless experiencing a rough patch. One measurement of this is the company’s share price, the best gauge of the thinking of those with skin in the game. Exxon has historically received the same treatment from investors as gold: a sure hold through good times and (especially) bad, when loyalists regard it as a certain safe harbor. But for months, its shares have been trading at their lowest prices since the company’s 1999 merger with Mobil.

Sankey attributes his change of heart to the dismal price of natural gas — Exxon owns a lot of natural gas reserves — and the company’s decision last December to buy XTO, a premier shale gas company that he doesn’t think makes Exxon more valuable. But Exxon’s shares had already begun to tank almost a month before the acquisition, and suffered another dive following the BP spill. The post-Macondo plunge has been strange since Exxon is the least active of the Big Oil companies in the Gulf, in addition to being the most safety-conscious ever since its Valdez disaster two decades ago.

So does Exxon deserved to be kicked around right now?

Perhaps. It’s a big-picture story. What’s really happened is that long-gestating challenges to Big Oil as a whole have finally become apparent even for Exxon. For years, Exxon had seemed immune to the existential trouble facing rivals who have been squeezed by national oil companies, and hampered by the question of how they will continue to survive at their historical heft and power. While rivals publicly struggled, Exxon continued to report enviable success at finding and buying new reserves to replace what it’s pumping. This a key metric — when a company is able to find new oil to replace what it’s drilled every year, it is regarded as a healthy entity.

But it’s emerged that for much of the last decade, Exxon has been finessing those reserve numbers. It replaced the reserves largely through an accounting gimmick — as this blog has detailed, in its press releases, the company tacked on reserves from Canadian oil sands, which until this year were prohibited as booked reserves by the Securities and Exchange Commission. Exxon explicitly conformed to the rules in its SEC filings themselves, but it made figuring all this out difficult by dividing up and scattering the figures among categories so that only the most diligent analysts and journalists — and those willing to hazard Exxon’s wrath — bothered to put together the pieces.

What is the big picture? Exxon is undergoing the start of a very public period adrift. It continues to be the best executor of gigantic, complex oil projects, but since those are too few to sustain the company’s voracious maw, it is looking seriously outside the box. Like others, it has turned to humongous natural gas projects (Sankey thinks that natural gas prices will continue to be depressed for another five years, which, given the surplus sloshing around the world, is probably right), including the world’s largest liquefied natural gas facility (Qatar) and the XTO purchase. It’s also looking at algae fuel. 

Eventually — meaning a decade from now or more — all this will turn right. Exxon will get used to the idea of shrinking. The natural gas bet will pay off — China, for one, will turn massively toward gas.

Will the world fear an algae and natural gas company? One wonders if it has the same ring to it.