At Exxon, CEO's promised turnaround sapped by chemicals,
Send a link to a friend
[January 28, 2020] By
HOUSTON (Reuters) - At Exxon Mobil Corp <XOM.N>,
CEO Darren Woods' plan to revive earnings at the largest U.S. oil and
gas company is being sidetracked by the two businesses he knows best:
chemicals and refining.
Another year of poor profit could require Exxon to re-evaluate its bold
spending plans or weaken its ability to weather the next oil-price
downturn, say oil analysts. Exxon already must borrow or sell assets to
help cover shareholder dividends.
The world’s biggest publicly traded oil firm after Saudi Arabian Oil Co
<2222.SE>, Exxon was long considered one of the best-managed majors and
most capable of coping with volatile prices due to its size.
Those advantages have slipped in recent years, however, with the drop in
once-steady earnings from chemicals. Its total shareholder returns of
negative 13% in the five years through this month compare with a 25%
gain at Chevron Corp <CVX.N> and 82% at BP Plc <BP.L>, according to
Two years ago, CEO Woods promised to restore flagging earnings by
heavily investing in operations even as rivals cut spending. The plan to
crank up chemicals, refining and increase oil output pushes capital
expenditures to as much as $35 billion this year, up from $19 billion in
2016, the year before Woods took over as CEO after running Exxon's
refining and chemical businesses.
Last March, he forecast potential earnings could hit $25 billion this
year and nearly $31 billion in 2021, close to the $32.5 billion it
earned in 2014 before the oil-price collapse.
The hoped-for payoff, however, has run headlong into a global chemicals
glut, tariffs on U.S. exports to China, and lower margins in fuels.
Exxon's refining profit last year fell on equipment outages.
The company declined to comment ahead of quarterly earnings, expected on
On Monday, Exxon shares traded under $65 - close to their level of 10
The company recently telegraphed weak fourth-quarter results because of
chemicals and refining businesses. Wall Street cut profit forecasts
through 2021 on the sour outlook for both. Exxon "seems to be tracking
way behind their own expectations," said Evercore ISI analyst Doug
Terreson, who slashed his quarterly forecast by a third, to 55 cents a
To see a graphic on Exxon's chemicals and refining profit, please click
In chemicals, Woods expanded the company's output of polyethylene, a
business where it has 9% of global production capacity, to benefit from
demand for plastic bags, food packaging and consumer goods. Output rose
last summer at the depth of the U.S.-China trade dispute, and industry
margins for a key polyethylene fell 30% compared with levels between
2016 and 2018, said James Wilson, analyst at pricing provider ICIS.
"The industry ended up overbuilding," said Pavel Molchanov, an analyst
with investment firm Raymond James. "Exxon, of course, is among the
companies that led that build-out."
[to top of second column]
Darren Woods, chairman & CEO of Exxon Mobil Corporation, attends a
news conference at the New York Stock Exchange (NYSE) in New York,
U.S., March 1, 2017. REUTERS/Brendan McDermid
In refining, outages and higher maintenance costs at Exxon refineries in the
United States, Canada and Saudi Arabia hurt profit, according to regulatory
Crude oil prices and slack global demand from the trade dispute are squeezing
profit across the industry, said Garfield Miller, chief executive at Aegis
This month, an Exxon regulatory filing implied a loss in chemicals of about $200
million for the fourth quarter, and refining earnings of just $400 million.
In contrast, chemicals and refining delivered $7 billion to $11 billion annually
for Exxon between 2013 and 2018. In the first nine months of last year, the
combined profit was $2.37 billion. Exxon's regulatory filing indicates 2019
earnings for the two at about $2.52 billion, the lowest in at least a decade.
Woods has halted the company's oil output declines by ramping up in shale. Oil
volume has risen year-over-year for five straight quarters, reversing annual
declines between 2016 and 2018.
To see a graphic on the company's oil and gas output, please click here -
TARIFFS HIT EXPORTS
Ending the trade dispute represents the biggest challenge. Global demand for the
plastic resins and pellets that Exxon makes is rising, said Marc Levine, chief
executive of Plantgistix, which provides logistics for U.S. plastic
"This is the first time in my lifetime and in the plastics industry's lifetime
where we make plastics resin for export," said Levine.
China in 2018 placed an additional 25% tariff on U.S. polyethylene imports, a
move that helped send North American margins to the lowest levels since 2011,
said Joel Morales, a polymers analyst at consultancy IHS Markit.
"Imagine having a lot of something and your biggest, easiest consumer you can’t
do business with," Morales said.
The January U.S.-China agreement does not remove Chinese or U.S. tariffs on
chemicals, plastics or oil.
Exxon has ramped up asset sales, aiming to collect $15 billion by next year to
balance spending. So far, results have been tepid. It expects to receive about
$3.6 billion from selling Norwegian oil and gas production assets.
Weak demand for those assets comes as rivals have written off the value of their
own properties. BP, Chevron, Equinor ASA <EQNR.OL>, Repsol SA <REP.MC> and Royal
Dutch Shell Plc <RDSa.L> last year cut a total of $22 billion primarily on U.S.
assets due to sharply lower gas prices. Exxon has not signaled whether it
expects any writedowns.
(Reporting by Jennifer Hiller in Houston; Editing by Gary McWilliams and Matthew
[© 2020 Thomson Reuters. All rights
Copyright 2020 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.