The Humbling
of Exxon

As for the lower earnings and sliding share price, Woods assured his conference-call audience that things were under control. Oil prices languishing in the $60-a-barrel range weren’t a problem but an opportunity. “We know demand will continue to grow, driven by rising population, economic growth, and higher standards of living,” Woods said. “We believe strongly that investing in the trough of this cycle has some real advantages.” He went on to describe how Exxon would spend in excess of $30 billion on exploration and other projects in 2020, more than any other Western oil company. “While we would prefer higher prices and margins,” he said, “we don’t want to waste the opportunity this low-price environment provides.”

Over the next several weeks, Covid-19 ravaged the oil industry by vaporizing global demand just as Russia and Saudi Arabia launched a price war. Investors were stunned to see oil fall to an 18-year-low of $22.74 a barrel at the end of March. An agreement aimed at cutting output and boosting prices failed to halt the slide, and on April 20 some oil contracts were trading for less than zero—sellers were paying buyers to take the crude. The fallout for producers large and small has been devastating. “You’re seeing fragilities exposed,” says Kenneth Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy. “Covid-19 is doing things that nobody could have imagined.”

Perhaps no company has been humbled as profoundly by recent events as Exxon, the West’s largest oil producer by market value and an industry paragon that sets the bar not just for itself but for its competitors. And the pandemic isn’t primarily to blame; the culprit is just as much the company itself.

The coronavirus has laid bare a decade’s worth of miscalculations. Exxon missed the wild and lucrative early days of shale oil. An adventure in the oil sands of Canada swallowed billions of dollars with little to show for it. Political tensions doomed a megadeal in Russia. Exxon ended up spending so much on projects that it has to borrow to cover dividend payments. Over a 10-year period, Exxon’s stock has declined 10.8% on a total return basis, which includes dividends. The company’s major rivals all posted positive returns in that period, except for BP Plc, which had the Deepwater Horizon spill in the Gulf of Mexico in 2010. The wider S&P 500 Index has returned nearly 200%.

The oil business is all about how much you produce, how low you get your costs, and how well you capture resources for the future. Exxon produces about 4 million barrels a day—essentially the same as 10 years ago, despite repeated vows to push the number higher. Meanwhile, the company’s debt has risen from effectively zero to $50 billion, and its profit last year was a bit more than half what it was a decade ago. Once the undisputed king of Wall Street, Exxon today is worth less than Home Depot Inc., which has less than half the revenue.

Former CEO Rex Tillerson oversaw that eventful span before leaving to become President Trump’s secretary of state. Under Tillerson, Woods ran Exxon’s then-successful refining business. The rangy, white-haired graduate of Texas A&M University is known for his unfailing optimism and affability. (Woods declined to be interviewed for this article.) The size of the job he has now is difficult to overstate. In an unprecedented crisis he’s guiding what author Steve Coll, in his book Private Empire: ExxonMobil and American Power, called “a corporate state within the American state … one of the most powerful businesses ever produced by American capitalism.”

For four decades Exxon has plowed ahead, eyes on the distant horizon, keeping its share price steady, financial returns healthy, and dividend rising through wars and recessions, Democratic administrations and Republican. Now the world will see how well Exxon can survive a pandemic—and whether it has what it takes to thrive in the aftermath.

Tillerson had been CEO for three years. A gruff Texan who’d risen through Exxon’s rough-and-tumble drilling and exploration businesses, he was about to make his biggest deal to date: the $31 billion acquisition of XTO Energy Inc., the largest independent U.S. producer of natural gas. The deal was bold not just because of the price, but also because in buying XTO, Exxon was tacitly acknowledging that concerns over greenhouse gases would spur demand for cleaner gas. The purchase also surprised some investors, who couldn’t easily see how the company would make a return. This wasn’t like Exxon, known for an iron discipline about cutting deals that offered clear, reliable payoffs. Tillerson told analysts, “We’ll probably suffer in the near term as we put it together. This is really about value creation over the next many years.”

XTO’s expertise was in extracting gas from subterranean rock using newly developed fracturing techniques. But as Exxon assimilated XTO, wildcatters such as Harold Hamm of Continental Resources Inc. and Scott Sheffield of Pioneer Natural Resources Co. were discovering that fracking worked for oil, too. Soon it became clear that the real riches in North Dakota and West Texas shale were in oil, because crude was rising in price while gas was plummeting.

As the decade wore on, the magnitude of oil accessible in U.S. shale would make the country an energy superpower to rival OPEC. Yet it would be years before Exxon would embrace shale oil. “I would be less than honest if I were to say to you ... we saw it all coming, because we did not, quite frankly,” Tillerson said at a 2012 event at the Council on Foreign Relations. Later, in 2019, he told a Houston industry conference that he “probably paid too much for XTO,” a rare Exxon mea culpa. Tillerson didn’t respond to requests for comment for this article.

Exxon wasn’t the only energy giant to whiff early on in the shale oil boom. So did Chevron, Royal Dutch Shell, and BP. That’s partly because the business was undergoing a fundamental change that the supermajors weren’t eager to accept. For decades, politicians and consumers were paranoid about running short of oil and gas. The biggest companies, led by Exxon, spent great sums exploring and drilling in ever more exotic and forbidding geographies, seeking the next mother lode.

Shale changed the calculus. Nobody doubted anymore that there were oceans of oil in the ground; it was a matter of getting it out as inexpensively as you could. The Hamms and Sheffields, fueled by cheap money from Wall Street, were driving down extraction costs and ramping up production in old American oilfields that the big boys had long ago abandoned. Some of them were a short drive from Exxon’s Irving, Texas, headquarters. Exxon, meanwhile, was taking chances on faraway lands.

Consider western Canada, where Exxon invested in the Kearl oil sands project. If you believed the world was short of crude, it sounded great: millions and millions of barrels waiting to be squeezed from Alberta sand, and Exxon’s technical prowess to plumb them. But upfront costs ran 18% higher than expected, and in 2014 oil prices began a nearly two-year swoon as OPEC flooded the world with oil in the hope of suffocating American shale drillers.

With crude dipping below $40 a barrel, Exxon’s hand was forced. In early 2017, after investing more than $16 billion, the company had to erase 3.3 billion barrels from its listing of crude reserves, most of it from Alberta. The company couldn’t control oil prices, of course, but the oil sands write-off was nevertheless part of the deepest reserves cut in Exxon’s modern history. (Exxon last year rebooked some of the Alberta reserves.)

Russia seemed more of a sure thing. Russian President Vladimir Putin and Tillerson had a history. In 2003, under then-CEO Lee Raymond, Exxon had come close to buying into Yukos Oil Co., the Russian oil producer owned by Putin adversary Mikhail Khodorkovsky. Putin balked at the prospect of Exxon calling the shots on production and other matters; Tillerson, then an Exxon senior vice president, was just as wary of Putin meddling with Yukos. He helped persuade Raymond to back off, which forged a bond between Putin and Tillerson that no other Western oil company executive enjoyed.

In 2011, Putin and Tillerson agreed on the first piece of what was envisioned as a $300 billion exploration deal that opened vast tracts of the Russian Arctic thought to contain billions of barrels of oil. It was an ideal match: Exxon wanted the natural resources, Putin the expertise and money. Then, in 2014, the Obama administration imposed sanctions on Russia for its annexation of Crimea. The sanctions prevented Exxon from continuing work on most of the Russia project. Another big fish had gotten away. Again, Exxon probably couldn’t have predicted Crimea—nor was it alone in seeking access to Russian crude. But maybe that’s what you get for trusting Putin.

By the time Tillerson departed to join the Trump administration, Exxon looked a lot different than it did when it reported those record earnings. Revenue and profit were a fraction of what they’d been, and the stock had lost its premium to other S&P 500 Index energy companies for the first time since 1997. Worse, for the first time since the Great Depression, Standard & Poor’s had stripped Exxon of its top credit rating. And the company faced a New York state lawsuit alleging that it had intentionally misled investors about the dangers of climate change. (The company won the case in December 2019.)

When Woods became CEO in January 2017, there were the predictable media stories about him stepping out of Tillerson’s shadow. That wasn’t going to be easy given the big write-off, the S&P downgrade, and the other unfortunate circumstances Woods inherited. But he was determined to rebuild Exxon with projects in Brazil, Guyana, Mozambique, and Papua New Guinea—the sorts of efforts that for some shareholders conjured unpleasant memories of Canada and Russia. Exxon also had finally jumped into shale oil with a $6 billion acquisition of acreage—negotiated by Tillerson—in West Texas’ prodigious Permian Basin.

Other supermajors weren’t as eager to embark on new endeavors. Like Exxon, they’d spent heavily, then paid for it during the 2014-16 crash. Burned investors were cooling on energy stocks and diverting their money into tech, pharma, and other sectors. Energy now makes up less than 3% of the S&P 500 Index, compared with more than 10% in 2009.

The growing movement to transition away from fossil fuels to solar, wind, and other energy sources was also peeling away investment. Such is the clamor in Europe that Royal Dutch Shell Plc and BP both have pledged to become carbon neutral by 2050 and invest heavily in renewable energy sources. Exxon has made no such pledge, instead investing in early-stage green technologies while insisting that the world will need more and more oil and gas until at least 2040, driven by China and India. Some on Wall Street see demand peaking as early as 2030.

At his first annual Investor Day, in March 2017, Woods vowed to spend more on new ventures so Exxon would be ready when the market turned. “We are confident,” he declared before dozens of analysts and shareholders in New York City. “Our job is to compete and succeed in any market, irrespective of conditions or price.”

Even then, a lot of institutional investors were inclined to take an Exxon CEO’s word as gospel. But an odd turning point came a year into Woods’s tenure. Wall Street analysts threw a little tantrum about the lack of forward-looking data in Exxon’s quarterly reports. They were growing weary of sunny promises belied by a lackluster share price.

With the company planning to spend so much money on stuff rivals saw little need for, the analysts zeroed in on why Exxon’s CEO never appeared on quarterly conference calls to answer their questions, as the top bosses at almost every other S&P 500 company did. “We think times have changed, and that Exxon may not necessarily be able to expect the market will continue to offer it the benefit of the doubt,” a Barclays Plc analyst wrote in a February 2018 investor note. In other words, Exxon was no longer a special case.

Two months later, Jeff Woodbury, Exxon’s then-investor relations vice president, promised that Woods would soon start participating in conference calls, saying, “We believe that the investment community did not have a very good understanding of what our value growth potential was.”

On that Thursday, the coronavirus had only begun to wreak havoc with America’s health and economic well-being. Social distancing wasn’t yet happening widely, though guests at the Exxon presentation were offered small bottles of hand sanitizer. Woods mentioned the virus as part of a “very challenging short-term-margin environment” facing Exxon in 2020. It was a new twist on a familiar spiel that investors could have heard Tillerson spinning years before. “The longer-term horizon is clear, and today our focus is on that horizon,” Woods said.

Exxon was for the most part sticking with its plan. Woods said he intended to pare spending barely 6%, to a maximum of $33 billion for the year, and emphasized the company’s “optionality”—a word he uses a lot—to adjust spending to react to market conditions. While others retrench, Woods said, “We believe the best time to invest in these businesses is during a low, which will lead to greater value capture in the coming upswing. You can do that if you have the opportunities and the financial capacity, which we do. This is a key competitive advantage of ours.”

Within 48 hours, Woods’s plan was in trouble. The Russians and Saudis, unable to agree on how much crude to pump, started pushing oil prices down. At the same time, demand was spiraling lower as lockdowns proliferated around the world. Storage tanks and pipelines were overwhelmed with unwanted oil, refineries reduced their inflows of raw crude, high-cost wells were shut. Analyst Paul Sankey of Mizuho Securities USA observed in an investor note that Exxon was “stepping up when the industry was stepping back. Turns out, they were stepping off a cliff.”

On March 16, S&P again downgraded Exxon’s credit rating, to AA from AA+, and said it could happen again “if the company does not take adequate steps to improve cash flows and leverage.” A week later the stock closed at $31.45, the lowest since 2002. Investors started to wonder whether Exxon might end its string of 37 straight yearly increases in its dividend. To cover that $14.7 billion payment—third-highest among S&P 500 companies—along with its aggressive capital spending, Exxon needed crude to fetch about $77 a barrel, the highest breakeven among oil majors, according to RBC Capital Markets.

The stock began to recover in early April, but it was all too much. On April 7, Woods said Exxon would cut 2020 capital spending to $23 billion—a drop of an additional $10 billion, or 30%—and shave operating expenses by 15%. The bulk of the cuts would be aimed at the Permian. Exxon would defer some activities in its Guyana project while postponing investment decisions elsewhere. “They cried uncle,” says Rice University’s Medlock. With the cuts, the breakeven dropped to $60 a barrel, still tops among the biggest companies.

You could almost feel Woods gritting his teeth in the company’s statement that day: “The long-term fundamentals that underpin the company’s business plans have not changed—population and energy demand will grow, and the economy will rebound.” Despite the cuts, Exxon still expected Permian production would rise. In other words, the company wasn’t abandoning its strategy; it was just hitting pause in deference to Covid-19.

Woods certainly can’t be faulted for not foreseeing the oil carnage of April, with the industry abandoning fracking and laying off more than 50,000 workers in March alone. And Exxon isn’t seeking government intervention to help save U.S. shale oil as Hamm, Sheffield, and others are. With as many as one in three shale players expected to exit the market one way or another, Exxon could be in a position to snap up cheap acreage after the virus retreats. “The large companies might actually get bigger on the back of this,” says Medlock.

For now, though, it’s hard not to see Exxon as just another company getting tossed around by the market. After the recent Investor Day, a reporter asked Woods if Exxon was still capable of navigating today’s up-and-down-and-down-some-more energy business. “I don’t think you stay in business for 135 years,” Woods said, “without being attentive to the needs of your customers, your stakeholders, and the communities that you operate in.” It wasn’t actually an answer.