The zombification of ExxonMobil, lead contractor and operator
Introduction
In an earlier column, January 16, I had intimated that this ongoing series of columns, which I have been pursuing could well turn out to be, frankly, an overly ambitious task. If truth be told, in effect I am seeking to construct a credible social science-based formulation, which hopefully provides insight, and thus aids my readership’s appreciation of the complex occurrences which have been manifested thus far in the explosive growth of Guyana’s oil and gas sector. Previously, I had described this task “as seeking: to advance a working hypothesis … that provides a … reasoned construct which correctly expresses the ruling or governing dynamic that … captures the unprecedented historical emergence of Guyana’s worldclass petroleum industry.”
To repeat, this task is being approached under four broad headings, the first of which has been considered. That is, a general hypothesis which explains Guyana’s revealed unprecedented and explosive “creaming curve,” covering the period from the announcement of its first petroleum discovery [mid- 2015] to its production of First Oil [December 2019]. As expressed in some detail last week that thesis for Pillar A is embodied in the notion of happenstance
Today’s column turns to a consideration of the second heading, Pillar B. This second Pillar articulates that the defining characteristic of ExxonMobil during this period Q2 2015 to Q3 2021 [the lead firm, lead contractor, and lead operator, located mainly, but not exclusively, in the Stabroek Block for the entirety of the period of analysis] has been a zombie company/business, as this term is presently defined in economics, business and finance.
In the next Section, I explore the notion of a zombie company, also termed the “living dead” or “walking dead” in these disciplines.
Zombie companies explained
In my presentation, the characterization of ExxonMobil as a zombie company plays an equally central role in understanding Pillar B as happenstance plays in the formularization of the dynamics of Pillar A’s world class creaming curve for Guyana. The zombification of ExxonMobil is therefore the second analytical foundation underpinning this series of columns. Given this, I lay out, in this section, a summary description of the key features which distinguish a zombie business. As matters stand, there is a voluminous body of literature on the topic of zombie firms and stocks. I would strongly recommend that readers google the topic and selectively consult. To be helpful I’ll refer to useful readings, going forward.
In the simplest language a zombie company can be described as one unable to cover its debt servicing costs from current profits over an extended period of time.
Investopedia, however, offers a fuller definition. That is: zombie companies are those “which earn just enough money to continue operating, and are in debt but unable to pay off their debt. Such companies given that they just scrape by meeting their overheads [wages, rent, interest payments on debt, for example] have no excess capital to invest to spur growth. Zombie companies are typically subject to higher borrowing costs and may be just one event – market disruption or a poor quarter performance - away from insolvency or a bailout. Zombies are especially dependent on banks for financing, which is fundamentally their life support.” In addition, Investopedia notes that zombie companies are also known as the “living dead or zombie stocks.”
In the literature, the term zombie company has been widely attributed to having been coined by Caballero et al in their article published in 2008, in the American Economic Review, AER, Vol 98 entitled “Zombie Lending and Debt Restructuring in Japan.” This article seeks to explain what is widely termed in economic development circles as Japan’s lost decade. That is the extended depression which the country endured during the 1980s. Subsequently, following the huge economic and financial setbacks caused by the Great Recession, which commenced in 2007/8, concerns over zombie companies shifted to other industrial economies. A classic study of this phenomenon is R Banargee and B Hofman, “The Rise of Zombie Firms: Causes and Consequences,” Bank of International Settlements, BIS, Quarterly Review September 2018.
These empirical studies found some defining characteristics in the performance of zombie companies; several of these should be noted here. One is that zombie firms are likely to have lower productivity than their otherwise counterparts. Indeed, a tendency to crowd out firms with higher productivity levels has been also observed in empirical studies [see OECD, Walking Dead? Zombie Firms Productivity and Performance in OECD Countries]. Second, zombie firms have been found to have lower investment levels than their peers in the sector. Further, zombie firms also offer less employment opportunities than their competitors. And finally, Zombie firms arise from episodic events like financial shocks, both national and international in scope. Two major consequences flow from this latter consideration. One is, there could be a ratchet or compounding effect. Second, the broader market environment plays an independent role in the rise of zombie businesses.
In next week’s column I shall analyze ExxonMobil’s performance in order to support its designation as a zombie company in the period of this analysis, from Guyana’s First Discovery [2015] to the end of last year.
Is Zombie status terminal?
There is a widely held view that once a company [business, firm or stock] arrives at zombie status there is no way out; it remains stuck as the living dead or actually becomes insolvent and of no commercial use. This is a serious mis-characterization. Zombie firms are not in a terminal limbo or phase of existence. Bailouts from Governments and reorganization are options for emerging from zombie status. My analysis of ExxonMobil will demonstrate that firm starting in Q3 2021 to show signs of turnaround from its zombie designation in the previous decade
Conclusion
Next week I continue this presentation using ExxonMobil’s data.