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Exxon (XOM) plans to take a non-cash cost of $17 billion to $20 billion — a large hit for an organization that was lengthy against taking writedowns. It is believed to be the most important such writedown in Exxon historical past.

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.

Exxon is hardly the one oil firm compelled to whittle down the worth of its fossil gas properties. Over the previous yr, Chevron (CVX), BP (BP) and Shell (RDSA) have all taken huge writedowns.

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.

Exxon can also be retreating from its daring plans to ramp up funding regardless of weak costs. The corporate now expects to spend $19 billion or much less in 2021 and between $20 billion and $25 billion a yr by 2025. That is a far cry from Exxon’s March projection that it could spend $30 billion to $35 billion a yr by 2025.
Exxon is scrambling to chop prices — and jobs. The corporate reiterated that it plans to shrink its international workforce by 14,000, or 15%, by the tip of subsequent yr. That features slicing about 1,900 jobs in america, principally at its Houston headquarters.
The pandemic and crash in oil costs has uncovered Exxon’s weakened monetary state. The corporate posted quarterly losses for the primary time in many years and it received kicked out of the Dow Jones Industrial Common after 92 years in that index.
As just lately as 2012, Exxon was the world’s most beneficial firm. However at present it’s valued at simply $161 billion — smaller than T-Cell US (TMUS), AbbVie (ABBV), Nike (NKE) or Adobe (ADBE). Exxon’s market valuation has crumbled by greater than half to a staggering $285 billion since peaking at $446 billion in mid-2014.

‘Precarious place’

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.

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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.

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“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.”

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