Fortunes ofExxon, Houston still linked
Irving-based oil giant’swoes strike deep here
Exxon Mobil has long been the bluest of blue-chip businesses, earning a reputation as a company that could be counted on to deliver steady returns year after year, decade after decade.
While investors benefited, so, too, did Houston. The nation’s largest oil company helped expand the economy and population of the nation’s energy capital, sparking development of master-planned communities such as Kingwood, world-renowned parks and cultural institutions.
When the Irving-based behemoth decided to close many U.S. facilities and bring those employees to the area in 2015, it built a 385-acre campus in Spring that houses about 10,000 workers. The facility helped reshape Houston’s northern exurban region with expansive development.
That’s why Exxon’s recent losses, accelerated by the economic fallout of the coronavirus pandemic, strike deep in Houston, analysts say. Houston is no company town, but its fortunes still rise and fall with oil giants such as Exxon.
The energy sector contributed $106.6 billion, or about 20 percent, to Houston’s gross domestic product in 2019, according to the Greater Houston Partnership, the city’s economic development group. Exxon, based in Irving but with a major pres
ence in Houston, last year made a $14 billion profit.
“For a long time, Exxon has done well and Houston has done well,” said Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis, a think tank pushing for sustainable energy. “But I would say in 15 to 20 years, you’ll have a much smaller oil and gas industry in Houston. Your fiscal economics and economic development choices are going to have to change.”
Houston faces a reckoning as its chief industry reels from the worst oil bust in decades and the industry’s chief company tries to recover from a record threestraight quarterly losses. It announced plans last month to lay off 1,900 U.S. employees, mostly in Houston.
It was a stunning reversal for Exxon, which just seven years ago was the world’s most valuable company and one that prided itself on riding out downturns without mass layoffs.
But times have changed. After years of diminishing returns, Exxon’s market value has plunged more than 70 percent to $154 billion from a record $527 billion in 2007, falling below its rival Chevron’s market value of $159 billion. In August, after nearly a century on the Dow Jones Industrial Average, Exxon was removed from the stock market index that serves as a benchmark for the U.S. economy. The move underscored Exxon’s falling influence in the stock market and chipped away at the company’s blue- chip status.
The global pandemic, which slashed demand for Exxon’s crude and petroleum products, exacerbated the company’s struggles. As revenue shrank, it deferred more than $10 billion of capital spending and cut operating expenses by 15 percent. The company last month stopped contributing to its employees’ retirement plans and kept its shareholder dividend flat for the first time since 1982.
Exxon in July launched a country-by- country review, looking for ways to maximize its highperforming assets and cut costs, including reducing management jobs. The company expects to ultimately slash 15 percent of its global workforce, now numbering 88,300 workers and contractors, including 12,000 in the Houston area.
“By taking these difficult steps, we expect to improve our competitive position and strengthen the foundation for our future success,” Exxon spokesman Todd Spitler said.
Even if oil demand lost to the pandemic returns in a couple of years, it is likely to shrink again as a growing number of countries and corporations cut fossil fuel consumption to help reduce climate change. The effort, according to the International Energy Agency, will propel oil consumption to its peak within a decade. From that point, crude consumption will decline in favor of renewable energy.
“Exxon had a business model that worked for a very long time, where economic growth and fossil fuel growth were inextricably tied,” Sanzillo said. “That was true for decades, but that’s no longer true.”
Structured to survive
Exxon’s longtime recipe for success had been a relentless focus on becoming the lowest- cost producer of oil and gas, taking advantage of its size to become the industry leader. Its drilling, refining and petrochemical operations have helped Exxon make money even when oil prices tumbled. Until this year, the company had never lost money for three quarters in a row.
“Exxon historically has been very, very disciplined at maintaining and developing low- cost assets,” said Ed Hirs, an energy fellow and economics professor at the University of Houston. “If you’re a low- cost player, you can be the last guy standing.”
But in the late 2000s, Exxon began to focus on growth instead of keeping costs down. Under former CEO Rex Tillerson, Exxon plowed money into high- cost, high-risk plays such as the Russian Arctic, Canadian oil sands and liquefied natural gas.
In 2010, some five years after the U.S. shale boom started, Exxon paid $30 billion for XTO Energy, giving the oil major a late entrance to the U.S. shale industry. The company also has invested in alternative energy, including biofuels. These projects have failed to meet expected returns on investment, analysts said.
From 2007 to 2019, Exxon nearly tripled its capital spending and added billions of dollars of debt, but production declined. During the same period, the company delivered shareholder returns — capital gains plus dividends — of less than 1 percent a year, compared with Chevron’s annual return of 6 percent, according to Carbon Tracker, a United Kingdom think tank focused on sustainable energy.
In 2017, when CEO Darren Woods took the company’s helm, Exxon’s stock price was $90.89 per share. At the end of December 2019, the price was $69 per share. By October, during the midst of the coronavirus pandemic, Exxon’s stock price was in the low $30s.
Exxon’s projects required higher upfront investment and “thatwas Exxon’s problem,” said Paul Spedding, a former oil analyst for 30 years and an adviser to Carbon Tracker. “What they need to do is get back to capital discipline. They need to shift from a growth mentality back to a cost mentality.”
Faith in fossil fuels
Exxon has doubled down on fossil fuels as rivals such as BP and Shell focus on on renewables. The company is investing in offshore Guyana, the company’s one big play in recent years that has delivered a high return on investment, as well as new technologies such as carbon capture to help reduce greenhouse gas emissions from its operations.
The company has said it expects oil demand to grow as developing countries seek affordable fossil fuels to power their economies. Although Exxon projects that oil and gas will make up about 50 percent of the global energy mix by 2040, down from about 60 percent today, it says population growth and the world’s growing middle class will continue to drive fossil fuel demand for decades.
“Some believe the dramatic drop in demand resulting from the coronavirus reflects an accelerating response to the risk of climate change and suggest that our industry won’t recover,” Woods said in a company note last month. “But as we look closely at the facts and the various expert assessments, we conclude that the needs of society will drive more energy use in the years ahead — and an ongoing need for the products we produce.”
If crude prices rise along with the population, Exxon stands to make money.
“This downturn has been tough on everyone, but Exxon is still one of the best-positioned companies in the industry with a tremendous amount of firepower,” said Andrew Dittmar, an analyst with Austin-based energy research firm Enverus. “Exxon moves on a decades scale, thinking what is the world going to look like over the next 20-plus years.”
Some analysts, however, are skeptical of Exxon’s projections of continued fossil fuel growth and question why the company remains so invested in oil and gas.
“The engines of the world economy are no longer as energy intensive as they once were,” Sanzillo said. “Right now, Exxon is looking for oil and gas markets to turn around for them, and that is a poor business strategy.”
“Why does Exxon feel it’s its job to meet the world’s oil demand?” Spedding said. “Saudi Arabia and OPEC can meet it quite easily. Given what’s going on at the moment, why add production capacity when it may not be needed? It doesn’t make sense to be in the race to be first.”
A signal to Houston
Ultimately, the company has to accept that crude prices may not reach $100 a barrel again, analysts said.
“The oil industry needs to be more like the tobacco industry, and accept that you’re not going to be a growth industry,” Spelling said. “Tobacco, in spite of the anti-smoking campaigns, is one of the best-performing sectors of the market. You just have to realize that if you’re in a sunset industry, you have to run it that way and manage the decline.”
For Houston, Exxon’s struggles should be a wake-up call to expand the economy beyond oil and gas, Sanzillo said.
There are signs Houston’s leaders are already thinking about a future with fewer fossil fuels. The city this year held its first Climate Week, a gathering of experts that discussed ways Houston and the energy industry could lead theworld to a low- carbon economy.
Despite the challenges facing the company, Exxon remains committed to Houston, Spitler said. During the pandemic, Exxon has increased production of polypropylene used to make medical- grade-masks and isopropyl alcohol used to produce hand sanitizer.
“As a longtime member of the Greater Houston community, Exxon Mobil continues to engage with business, and support community and charitable organizations across the region,” Spitler said. “In Houston and globally, we also continue to assist in community-level COVID relief efforts with donations to support food banks and provide fuel, meals, and masks for health care workers and first responders.”
Although Exxon has helped make Houston what it is today, it may be other companies and industries that shape its future, Sanzillo said.
“For public officials in Houston, it’s motivation for change and to diversify your economy,” Sanzillo said. “It’s not going to be easy to replace oil and gas, but you’ve got some time on your side.”