The pure gasoline market is depressed, with gasoline buying and selling at about $3 per million British thermal items — lower than half the worth on the time Exxon swooped in to purchase XTO. Pure gasoline peaked in late 2005 at greater than $15 per million BTU.
However as we speak the world has a glut of pure gasoline because of the shale growth that unlocked huge quantities of fossil fuels in the USA.
Exxon’s “colossal gasoline asset impairment” is administration’s “clearest acknowledgement thus far that the XTO deal was an epic failure — not that any reminders of this are wanted,” Raymond James analyst Pavel Molchanov wrote in a be aware to purchasers 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 gasoline properties in western Canada and Argentina.
However not solely is Exxon slashing the worth of its pure gasoline portfolio, the corporate has fully eliminated a few of these gasoline properties from its improvement plan. Exxon mentioned in an announcement that it might promote a few of these belongings, “contingent on purchaser valuations.”
Shrinking the finances
As an alternative of plowing more cash into pure gasoline, Exxon is promising traders it’ll “prioritize near-term capital spending on advantaged belongings with the very best potential future worth.”
Particularly, Exxon mentioned it’ll concentrate on growing its huge oil assets 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 will likely be sufficient to save lots of Exxon’s dividend, which is important 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’t fund its dividend in 2021” with out further 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 endlessly.
“It is a query of how a lot debt they wish to tackle,” mentioned RBC Capital Markets analyst Biraj Borkhataria. “The dividend appears to be like 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 firms 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 completed and the very fact they’ve underspent for a few years,” mentioned Borkhataria. “They must execute on their present tasks to guard the long-term viability of the enterprise.”