The pure fuel market is depressed, with fuel buying and selling at about $3 per million British thermal models — lower than half the value on the time Exxon swooped in to purchase XTO. Pure fuel peaked in late 2005 at greater than $15 per million BTU.
However at present the world has a glut of pure fuel because of the shale growth that unlocked huge quantities of fossil fuels in america.
Exxon’s “colossal fuel asset impairment” is administration’s “clearest acknowledgement to this point that the XTO deal was an epic failure — not that any reminders of this are wanted,” Raymond James analyst Pavel Molchanov wrote in a notice to shoppers Tuesday.
The majority of the writedown covers properties in Appalachia, the Rockies, Texas, Oklahoma, Louisiana and Arkansas that have been acquired within the XTO deal. The remainder of the cost is for abroad fuel properties in western Canada and Argentina.
However not solely is Exxon slashing the worth of its pure fuel portfolio, the corporate has fully eliminated a few of these fuel properties from its growth plan. Exxon mentioned in a press release that it could promote a few of these property, “contingent on purchaser valuations.”
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Shrinking the finances
As an alternative of plowing more cash into pure fuel, Exxon is promising traders it’s going to “prioritize near-term capital spending on advantaged property with the very best potential future worth.”
Particularly, Exxon mentioned it’s going to deal with growing its huge oil sources in Guyana, accelerating manufacturing within the Permian Basin of West Texas and a few exploration in Brazil.
Wall Road is hoping the belt-tightening and a extra conservative finances shall be sufficient to avoid wasting Exxon’s dividend, which is essential to its enchantment to traders. However analysts are skeptical. This yr marks the primary time since 1982 that Exxon failed to extend its dividend.
Molchanov, the Raymond James analyst, warns that “Exxon can not fund its dividend in 2021” with out extra borrowing or asset gross sales.
For now, the capital markets are huge open and Exxon ought to be capable of borrow to fund the dividend. However that may’t final ceaselessly.
“It is a query of how a lot debt they need to tackle,” mentioned RBC Capital Markets analyst Biraj Borkhataria. “The dividend seems challenged.”
And even when Exxon avoids a dividend discount, its sharp spending cuts elevate questions in regards to the firm’s long-term future.
Oil corporations want to repeatedly plow cash into drilling — in any other case manufacturing dries up, hurting money flows.
“The corporate is in a precarious place due to the offers they’ve performed and the actual fact they’ve underspent for a few years,” mentioned Borkhataria. “They should execute on their present initiatives to guard the long-term viability of the enterprise.”