As Exxon Mobil goes, so goes the rest of the global oil and gas sector?
The oil major has told investors in a trading update that while they can expect improved revenue and profits in some parts of the business for the December quarter – the previously warned of huge asset write down has narrowed to a massive $US20 billion.
That’s company’s biggest ever write down and mostly relate to shale gas assets bought in the takeover of XTO Energy in 2010. The write down also includes properties in Argentina and western Canada.
The good news/bad news update came in an SEC filing on the second last day of 2020 and just about sums up the year for energy companies – occasional good news amid the dross of losses and write downs from the impact of COVID on demand (especially from airlines and automotive) and the continuing rise of renewables such as wind power and electric vehicles.
The write-down of mostly natural gas properties was previously estimated to be between $US17 billion and $US20 billion in a filing in late November and the latest filing narrowed the range of the impairment charge.
Demand for gas has been hit by weak prices and demand thanks to the rising production of electricity from renewable sources and the impact of COVID on industrial and residential demand.
Even though gas is now the number energy source for electricity, Exxon Mobile’s write downs tells is the major believes the assets will not be as profitable in future years as previously thought.
With the upsurge in COVID cases, especially in the US, Europe, the UK, parts of Asia, Australia and Africa as we move into the new year, 2021 is likely to see further pressure on energy company asset values from a weak recovery in demand airlines, automotive and industrial demand.
Exxon’s news is likely to be followed by similar cuts from other majors such as Shell, Total, Chevron and BP.
Exxon has already signalled plans for deeper cost cuts in 2021 with a $US10 billion cut to capex this year and next, and the first stages of a 15% global workforce reduction (around 14,000 people) that will continue throughout next year.
More assets are slated to be sold, even though 2020 saw it fail to sell off its 50% of the Bass Strait oil and gas venture it owns with BHP holding the other half.
The filing suggests that as Exxon reported losses in the prior three quarters of 2020, the impairment loss means the company will end the year deeply in the red.
Reuters reckons Exxon could report a loss of $US3.47 billion for the 4th quarter, compared with a profit of $US5.69 billion for the final three months of 2019.
Seeing the company lost $US2.370 billion in the 9 months to September, it is looking at a loss of more than $US5 billion for the year as a whole.
The filing showed Exxon expects higher prices will sequentially lift its oil and gas operating results by between $US200 million and $US1 billion. That business reported a $US383 million operating loss in the third quarter.
The filing also warned of another operating loss in refining, but higher profit margins for chemicals will see operating profit in that unit rise by between $US200 million and $US400 million in the quarter.
In the three months to September, Exxon Mobil’s refining business reported a loss of $US231 million while chemicals earned a $US661 million profit.
Exxon Mobil shares fell 41% in 2020, almost double the 21% and 22% falls in the price of US West Texas Intermediate crude and Brent crude.
Seeing the S&P 500 rose 15%, it was a serious amount of underperformance for the company in what was a very troubled 12 months for the energy sector.
