The big international oil companies are reporting one of their worst annual performances in decades and signaling that the pandemic could continue to challenge their businesses in 2021.
Exxon posted its fourth consecutive quarterly loss for the first time in modern history, driven by a more than $19 billion write-down. Excluding the impairment, Exxon turned a quarterly profit of $110 million.
BP reported a replacement cost profit—a metric similar to the net income figure that U.S. oil companies report—of $825 million for the three months ended Dec. 31, from a loss of $4 million in the year-earlier period.
Covid-19 has sapped demand for oil, hitting prices and prompting the world’s biggest energy companies to slash spending, cut jobs and write down the value of their assets. Amid the crisis, Exxon and Chevron discussed a merger of the U.S. oil giants last year, according to people familiar with the matter, although the talks didn’t progress.
“The past year presented the most challenging market conditions Exxon Mobil has ever experienced,” said Chief Executive Darren W. Woods.
Falling Behind
Energy was the worst-performing sector in the S&P 500 last year.
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Total shareholder return by sector for 2020
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Total shareholder return by sector for 2020
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Total shareholder returns by company
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Total shareholder return by sector for 2020
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Exxon remains under pressure from a pair of activist investors. One of them, Engine No. 1 LLC, nominated four directors to Exxon’s board last week and called for it to make strategic changes to its business plan. On Tuesday, Exxon announced it had elected a new independent director to its board and is continuing discussions with other director candidates.
Engine No. 1 said the changes were insufficient.
“A board that has underperformed this dramatically and defied shareholder sentiment for this long has not earned the right to choose its own new members or pack itself in the face of calls for change,” Engine No. 1 said in a statement. “Exxon Mobil shareholders deserve a board that works proactively to create long-term value, not defensively in the face of deteriorating returns and the threat of losing their seats.”
The Pandemic’s Effect on the Oil Industry
BP said Tuesday that Covid-19 restrictions would continue to sap demand early in 2021 and that the pandemic might have an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period.
Still, Chief Executive Bernard Looney said the company expects demand to stabilize this year, although the speed and degree of the recovery is uncertain.
“It’s all dependent on vaccine rollouts, vaccine efficacy and OPEC compliance,” Mr. Looney said. Unlike its U.S. counterparts, BP hadn’t spoken to any of its peers about mergers, Mr. Looney said, adding that the company was focused on executing its strategy to pivot toward low-carbon energy.
BP’s shares traded 3.1% lower in London on Tuesday as the results came in below analysts’ expectations. Exxon was slightly up premarket Tuesday following its results.
Other oil companies are also feeling the strain. Royal Dutch Shell RDS.A -1.08% PLC reports Thursday and has telegraphed it will take a large write-down.
Royal Dutch Shell has indicated it will also take a large write-down.
Photo: Chris Ratcliffe/Bloomberg News
The pandemic has already triggered the largest revision of the value of oil-and-gas assets in at least a decade, as companies sour on costly projects amid the prospect of low prices for years. Exxon’s more than $19 billion write-down, primarily related to U.S. shale gas assets, is among the largest ever taken in the industry.
The Irving, Texas-based company cut nearly $12 billion from its 2020 capital expenditures and $8 billion from operating expenses in response to the pandemic and said Tuesday that it would trim operational spending by another $3 billion by 2023.
Exxon plans to spend as much $25 billion a year on capital expenditures through 2025, but said Tuesday that if Brent crude oil prices fall below $45 a barrel it could cut spending further. The company said it expects to cover its dividend, which costs it about $15 billion annually, from its cash flow in 2021, assuming Brent is $50 a barrel. It was trading around $56 Tuesday.
Activist investor Engine No.1 has argued Exxon should focus more on investments in clean energy while cutting costs elsewhere to preserve its dividend. However, Exxon and rival Chevron haven’t set out plans to invest substantially in renewables, instead choosing to double down on oil and gas. Both companies have argued that the world will need vast amounts of fossil fuels for decades to come, and that they can capitalize on current underinvestment in oil production.
On Monday, Exxon said it would form a business unit focusing exclusively on technologies to reduce carbon emissions, investing about $3 billion through 2025, primarily on carbon-capture projects, which gather carbon emissions from industrial processes, or directly from the air, and deposit them underground.
BP has suggested that demand for fossil fuels might never fully recover and that the pandemic could accelerate the pace of transition to a lower-carbon economy. Under Mr. Looney, BP has embarked on a plan to reduce its dependence on oil and gas, while increasing investments in low-carbon energy like wind and solar power.
French energy giant Total SE TOT -0.31% has also outlined plans to build up its renewables business, while Shell has signaled its intention to set out a similar path later this month.
“An unprecedented demand collapse has forced the hand of Big Oil to right-size their dividends and capital frames; meanwhile plans for energy transition have been accelerated,” said Christyan Malek, an analyst at JPMorgan.
Total has outlined plans to build up its renewables business.
Photo: Benjamin Girette/Bloomberg News
To bolster its finances, BP has been selling assets to reduce debt. The company said it was now more than halfway to its target of $25 billion of asset sales by 2025, helped Monday by the sale of a 20% stake in a gas development in Oman. BP aims to lower its debt to $35 billion by the first quarter of next year, down from $39 billion at the end of 2020.
Rebecca Fitz, a senior director at Boston Consulting Group, said she thinks both the European and American strategies can work, but both must deliver better returns and produce less carbon to be palatable to investors.
“When you have less capital, choices around how you allocate that capital are more stark,” Ms. Fitz said.
—Allison Prang contributed to this article.
Write to Christopher M. Matthews at [email protected] and Sarah McFarlane at [email protected]
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