It’s been a rollicking year for stocks, with unexpected pandemic high-flyers such as Zoom and Peloton, and reeling pandemic victims such as Carnival and United Airlines. But there’s a deeper tale in the fortunes of one declining giant: oil titan Exxon Mobil (XOM), which is likely to report its first annual loss in modern times this year.
Exxon became the world’s most valuable company in 2005, and in 2008, as oil prices neared $150 per barrel, it turned a $45 billion profit, the largest in U.S. history at the time. Regulators clamored for a windfall tax and consumers cursed the company as gas prices crested $4 per gallon, and most of the world began to suffer a sharp downturn that came to be known as the Great Recession.
Exxon battled it out with Apple for most valuable company until 2013, when Apple began to run away with the title. That was no shame to Exxon, since the whole tech industry was ascendant. But since then, Exxon has slumped as the role of oil in the world economy has declined—a transition that could accelerate as the incoming Biden administration mounts the biggest federal pivot ever away from carbon energy.
The decline in oil prices
Like most oil majors, Exxon’s stock price and market cap move in proportion to oil prices, which have fallen by roughly half since 2014. Much of that has been due to the new drilling method known as fracking, which has flooded the world with oil and natural gas. At the same time, many countries are subsidizing green energy sources such as wind and solar, softening oil demand. The coronavirus recession torpedoed demand in 2020 and sent oil prices plunging, though they’ve now rebounded. Still, the current price of about $47 for West Texas crude is 56% below the 2014 peak of $107 per barrel.
The once mighty Exxon is now leaner and warier. The stock price has fallen by 47%, including dividend payments, since it peaked in 2014—underperforming the S&P 500 index by 114%. Exxon’s market value is now $180 billion, a startling 65% decline from its peak in 2007. Instead of No. 1, it’s now the nation’s 37th most valuable company. In August, S&P Dow Jones Indices removed Exxon from the Dow Jones stock index for the first time since 1928, when the company was known as Standard Oil of New Jersey.
Exxon is likely to lose around $1.8 billion this year, according to S&P Capital IQ. That would be the company’s first annual loss since at least 1980. The company plans to lay off 15% of its global workforce, including 1,900 in the United States. In October, it declined to raise its quarterly dividend for the first time since 1982, fueling speculation a dividend cut is coming.
All the big oil companies have been struggling amid depressed oil prices. But Exxon has even underperformed competitors, especially European firms such as BP and Shell that have more aggressively tried to diversify into renewables. “There’s a very stark divide between European oil majors and U.S. majors,” says Trevor Houser, head of the energy and climate practice at the Rhodium Group research firm. “The Europeans are genuinely trying to pivot to become energy companies. The U.S. majors haven’t made that pivot. If oil prices stay low, that bet by the European majors will pay off.”
Exxon is betting the world economy will run on oil and gas for decades to come, pushing prices—and Exxon’s prospects—back up. It’s turning into a long wait. Exxon, late to the fracking revolution, bought driller XTO in 2010 for $30 billion—a price the CEO at the time, Rex Tillerson, now concedes was too high. The deal would have looked shrewd had oil and gas prices returned to the highs of 2008. Instead, prices collapsed.
History of resisting climate action
Unprecedented losses in 2020 have forced Exxon to curtail investments and reduce drilling targets in areas such as the Permian Basin in Texas. Activist investors are pressuring the company to do more to combat global warming and improve its financial performance. Earlier this year, CEO Darren Woods mocked the green-energy plans of other oil companies as a “beauty competition.” But in mid-December, Exxon released its own five-year plan to reduce carbon emissions. Climate experts are skeptical, given Exxon’s long history of resisting climate action.
Incoming President Joe Biden doesn’t plan to offer Exxon a reprieve. Biden has promised the most ambitious climate agenda ever, with a goal of net-zero carbon emissions in the United States by 2050. That would require sharp declines in oil and gas consumption, plus the rapid adoption of renewables such as wind and solar power, and other technology breakthroughs. Biden is likely to raise fuel-economy standards for vehicles, toughen pollution rules for power plants and promote new incentives for the use and production of renewables. Biden also vows to ban new drilling on public land and kill federal subsidies for oil companies.
Exxon isn’t defenseless. The oil industry remains politically powerful and Exxon is still the biggest player. Drillers provide high-paying jobs in traditional oil states like Texas, along with swing states such as Colorado, Ohio and Pennsylvania. During the presidential campaign, Biden struggled to placate climate activists without alienating energy workers. He insisted he’d protect energy jobs, but he also promised to “end fossil fuel.” Exxon has never faced that sort of threat.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: [email protected]. Click here to get Rick’s stories by email.
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