INTRO: Just 8 years ago, Exxon was the most valuable
company in the world boasting a peak market cap of $446 billion.
But since then, Exxon has slowly slipped down the list.
First, they lost the number 1 spot, then they dropped out of the top 10, and now they’ve
tumbled all the way down to number 33 with a market cap of $259 billion.
That means that Exxon is officially over ten times behind the new market leader Apple.
To make things worse, Exxon has struggled to regain profitability over the past year,
and to top it all off, Exxon was kicked out of the Dow Jones last year.
The Dow Jones is a combination of the top 30 American companies that hit a set of guidelines,
and Exxon had been part of this list for 92 years.
Yet, it looks like hitting a 100 years in the Dow simply wasn’t in the cards for Exxon.
At first glance, it’s easy to attribute this fall to the rise of EVs, but EVs only
account for 3% of global car sales.
So, even though an EV takeover is inevitable, EVs aren’t really the ones eating into Exxon’s
top and bottom lines today.
In fact, Exxon would likely be in a very similar situation even if it wasn’t for EVs, so
here’s what happened to the oil king that dominated the businessworld for nearly a century.
FALLING OIL PRICES: Taking a look back, the most obvious factor
behind Exxon’s fall is of course crashing oil prices.
When your entire business is based on oil, you’re basically screwed if oil takes a
nosedive, and that’s exactly what happened between 2014 and 2016.
Within those two years, oil prices plummeted from $120 per barrel down to just $40 per
barrel.
This flash crash was caused by a handful of factors most of which Exxon had no control
over.
First of all, the US dollar was popping off against the Euro, and given that commodities
are generally quoted in USD, a strengthening dollar meant falling commodity prices.
In the meantime, China was actively trying to do the exact opposite by devaluing the
yuan in 2015.
You see, China likes to maintain a weak currency on purpose, and while that might sound stupid,
there is reason behind the madness.
When you have a weak currency, it’s easier for foreigners to afford your exports which
increases exports.
At the same time, it also becomes harder for citizens to afford imported items which reduces
overall imports.
While this is a good thing for China, this was terrible for Exxon given that China is
the world’s largest oil importer.
All of a sudden, Exxon had substantially less revenue from Americans and the Chinese, and
to make things worse, the middle eastern oil giants would screw over Exxon as well.
Given the reduced demand for oil, it would’ve been a smart move for OPEC to decrease oil
production.
Now, a lot of you would argue that decreasing production is an unethical way to prop up
prices, but from their side it would’ve been smart.
But, they decided not to reduce oil production which led to a surplus in oil which further
drove down prices.
And the nail in the coffin was the Iran nuclear deal which allowed Iran to start exporting
oil again.
It’s not clear how much of an impact this additional supply actually had, but the threat
itself was enough for investors to flee oil.
All of these factors combined led to Exxon’s revenue crashing over 50% from $440 billion
down to $205 billion.
But falling oil prices was just a taste of what was to come.
NEGATIVE OIL PRICES: Usually, with any investment, the worst case
scenario is just losing everything you put in.
Unless you’re shorting a stock, the worst case scenario is just 0.
But, with oil prices things went beyond zero when oil prices literally went negative.
No one really expected how quickly the pandemic could shut down the world and decrease oil
demand to nearly 0.
So, it’s not surprising that producers and refiners were left with large amounts of excess
oil once the pandemic hit.
The problem though is that you can’t just throw the oil into some reserves and try to
sell it once demand recovers.
Oil giants already had hundreds of tankers carrying millions of barrels worth oil to
their destinations.
But once they reached their destination, customers no longer wanted the oil, so they literally
had millions of barrels of oil just floating around in the ocean doing nothing.
And every day these tankers were just sitting around, loads of money was being burned.
It was just a matter of time until someone broke and paid someone to simply take away
the oil, and that’s exactly what happened on April 20, 2020.
In just one day, crude oil futures fell 306% from $18.27 to negative $37.63.
And just when you think things can’t get any worse, Saudi Arabia and Russia decide
to have a price war.
Common sense would tell you that when oil prices are plummeting and even going negative,
it’s a good time to heavily reduce or even halt oil production.
Yet, Saudi Arabia and Russia decided to do the exact opposite.
Both of them knew that the other was losing money, and so, they tried to basically run
each other out of business.
Eventually, they did come to a truce, but not before pumping up OPEC oil output to 30
year highs when prices were literally negative.
Anyway, Exxon wasn’t the leading voice behind the 2014 oil crash, the pandemic, or negative
oil prices, but they got obliterated in the crossfire.
Now, nothing we’ve discussed so far is specific to Exxon, and all oil companies were hurt
by these events.
But unlike Exxon and Shell, oil companies like Chevron have almost fully recovered.
In fact, Chevron is only 10 to 15% away from all time highs, and they never got kicked
from the Dow Jones.
So, clearly, a lot of the blame has to be placed on Exxon as well.
UNWISE INVESTMENTS: Probably the easiest loss Exxon could’ve
avoided was making outsized bets on the oil industry.
Even though EVs haven’t made a big dent in the overall oil industry yet, it’s just
a matter of time, and investing heavily into oil ventures is plain stupid.
But, that’s exactly what Exxon has been doing over the past decade.
In 2009, they spent $41 billion buying XTO energy.
In 2012, they spent $2.6 billion buying Celtic Exploration.
In 2017, they spent another $2.5 billion acquiring InterOil.
And that same year, they spent another $6.6 billion to buy the Bass Family’s Permian
assets.
Aside from making acquisitions left and right, Exxon has also been investing heavily into
their own business.
As recent as January 2020, the CEO of Exxon, Darren Woods, announced that Exxon would be
investing $30 billion into exploration projects in 2020 alone.
And the plan was to spend $30 to $35 billion every year through 2025.
Unfortunately for Exxon, all of these poor investments are only starting to bite back
after a decade.
For the longest time, Exxon didn’t want to admit that these were bad investments.
They insisted that these investments just needed time to recover, and they refused to
value these assets below what they paid for them.
But recently, Exxon has been getting sued for overvaluing their assets and misleading
investors.
Exxon finally gave in at the end of 2020, and wrote off the $41 billion XTO investment
as a $20 billion loss.
And this right here is what really killed Exxon in 2020.
Even during the height of the pandemic, Exon was only losing half a billion to $1 billion
per quarter.
But after writing off this loss in the last quarter of 2020, Exxon posted a $20 billion
loss.
And that marked the end of Exxons first unprofitable year in 40 years.
Exxon isn’t in the clear yet either, there’s still multiple ongoing lawsuits accusing Exxon
of overvaluing their other assets.
So, last year’s painful write down may just be the first of many.
DIVIDEND LEGACY: Moving onto Exxon’s other big money drain,
we have their dividend payments.
One of the defining characteristics of Exxon stock is their flawless history of dividend
payments.
Exxon has literally never missed a dividend payment in their history.
Standard Oil began paying a dividend in 1882, and Exxon has kept up the tradition ever since
the break up.
This means that Exxon didn’t miss a payment through world war 1, the great depression,
world war 2, the inflation crisis, the 1973 oil crisis, the dotcom bubble, the financial
recession, and of course the pandemic.
This places Exxon in an elite group of stocks called dividend aristocrats who not only never
miss a payment, but continuously increase their payments.
It’s not always super easy to pay a dividend though especially a high yielding dividend.
Over the past few years, Exxon has been forced to borrow money to pay out their dividends,
and while that’s super irresponsible, at this point, a lot of Exxon’s leadership
would rather file for bankruptcy than miss a dividend payment.
And I don’t blame them.
If they missed a dividend payment, not only would they ruin a 140 year streak that’s
virtually impossible to rebuild, but they would give up one of the only things that’s
still going for Exxon.
Exxon may be going bankrupt over the next decade, but one thing many investors are still
extremely confident in is that Exxon will pay dividends till the very end.
And if Exxon were to miss a payment right now, that would simply destroy investor trust
and drive the stock price even lower, at least in the short term.
With that being said though, paying out a massive dividend given the company’s situation
is extremely irresponsible, and it’s objectively holding back the company.
BLEAK FUTURE: Looking into the future, it’s not clear
where Exxon is headed.
In terms of financials, Exxon is nearly back to pre-pandemic profit levels on a quarterly
basis.
But, the thing to keep in mind is that the pandemic wasn’t what hurt Exxon the most,
it was actually writing down that $20 billion investment loss.
And given that Exxon has plenty of other such investments, it’s very possible that they
continue to incur such losses over the next decade.
In the meantime, Exxon refuses to embrace renewable energy.
Exxon is actually currently being investigated for spreading disinformation regarding climate
change and downplaying its effect.
When questioned in court, the CEO, Darren Woods, of course denied these allegations.
But whether Exxon was spreading disinformation or not, their stance on the future is crystal
clear.
Darren Woods has repeatedly reiterated that climate change does not pose any long term
threats to the oil industry.
In my opinion, this viewpoint is fundamentally flawed as the transition to renewable energy
has little to do with climate change.
Now, don’t get me wrong here, switching to renewable energy will help with combating
climate change, but climate change is not what’s pushing the transition itself.
The primary factor that will move the needle in my opinion is electric options being more
convenient, easier to maintain, and most importantly cheaper.
Once these demands are met, companies and people will switch to renewable options regardless
of whether they believe in climate change or not.
Now, it’s not like this change is gonna happen overnight and Exxon is about to go
bankrupt next year.
But, the longer Exxon chooses to ignore this trend, the more likely it is that they’ll
end up like Texaco.
But that’s just what I think.
Do you guys think Exxon has a future?
Comment that down below.
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