ExxonMobil Is Digging Its Own Grave
By OilPrice.com
The era of the mighty U.S. major oil industry is coming to an end as the country’s largest petroleum company is in big trouble. While ExxonMobil has been the most profitable U.S. oil company in the past, it has now suffered its worst year on record. Exxon net income will have declined a stunning 85 percent since 2012.
Actually, the situation at Exxon is much worse if we dig a little deeper.
To understand the real profitability of a company, we have to look at its cash flow, or what is known as free cash flow. Free cash flow is calculated by deducting capital expenditures (CAPEX) from the company’s cash from operations. ExxonMobil’s free cash flow declined from $24.4 billion in 2011 to $1 billion for the first nine months of 2016.
So, here we can see that Exxon’s free cash flow of $1 billion (2016 YTD) is down 95 percent from $24.4 billion in 2011. The reason for the rapidly falling free cash flow is due to skyrocketing capital expenditures and falling oil prices. But, this is only part of the picture.
If we include dividend payouts, Exxon’s financial situation drops down another notch. While free cash flow does not include dividend payouts, the money Exxon pays its shareholders must come from its available cash. By including dividend payouts, the company was $8.3 billion in the hole in 2015.
Now, even though Exxon stated a $45 billion net income for 2012, its free cash flow minus dividends was only $11.5 billion. Moreover, the company didn’t make any money in 2013 or 2014 after dividends were paid to their shareholders. Thus, deducting dividends from the equation provides a more realistic picture, especially since Exxon has been forking out serious sums of money to its shareholders.
The reason for the huge decline in ExxonMobil’s surplus cash, even at much higher oil prices, was due to two factors; 1) higher capital expenditures and, 2) higher dividend payouts.
While higher dividend payouts put more stress on the company’s financial situation, the real problem is the massive increase in capital expenditures
The Massive Increase Of Capital Expenditures Is Causing Havoc At ExxonMobil
When the company realized towards the end of 2013 that the market would not afford to pay $120 a barrel (the cost for new oil projects), Exxon started cutting back on exploration and capital expenditures. Even though total liquid production increased to 2.34 mbd in 2015, capital expenditures declined to $26.5 billion.
Unfortunately, the situation continued to deteriorate in 2016. According to Exxon’s Q3 report, capital expenditures in the first nine months of the year declined another 40 percent compared to the same period in 2015. Without increased capex spending, it is going to be quite difficult for the company to sustain production and to remain profitable.
So, when we consider that Exxon had to triple its capex spending to maintain production as well as increase dividend payouts to keep shareholders happy, the falling oil price is totally gutting the company from within.
While the evidence shown here is bad enough, I hate to be a broken record, but the situation is far worse for Exxon when we include two more negative factors.
Exxon Spent The Majority Of Its Surplus Cash To Buy Back Shares Rather Than Fund New Oil Projects
It seems as if Exxon realized early on that peak oil had finally arrived (privately, of course), so it decided to not waste too much money on future oil projects. Instead, the company spent a massive amount of money on stock repurchases over the past two decades… especially since 2005.
While Exxon had been repurchasing their stock for several years, I had no idea of the total amount. You see, the net total free cash flow, including dividends, for Exxon was $190 billion from 1997-2015. Looking over company’s balance sheet, I had no idea where all that money had gone. I was talking to financial expert Vic Patane a few days ago, and he said, “You should check out their stock repurchases.” So, I did… and what a surprise.
According to ExxonMobil’s Annual Reports, the company spent a staggering $260 billion on stock repurchases since 1997.
The lion’s share of their stock buybacks were between 2005 and 2014. In that ten-year period, Exxon purchased a staggering $220 billion of its own shares. Now compare that to the company’s total capex spending of $245 billion during the same time period:
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Amazingly, Exxon only spent 11 percent more on it total capital expenditures than it did on stock buybacks. Which means, the largest oil company in the United States decided to repurchase roughly a third of its outstanding shares (2005 to 2014), rather than use its surplus cash to fund new oil projects. Exxon’s outstanding shares declined from 6.1 billion in 2005 to 4.2 billion in 2014.
This is certainly an interesting way for the leading U.S. oil company to use its surplus cash. For those who continue to be skeptics of the peak oil theory, you need to wake up and look at the data!
Okay, now that we know the lower oil price is gutting the entire U.S. oil industry, what is it doing specifically to Exxon? Good question.
Exxon’s Long Term Debt Surges In The Last Three Years
So, if we include share buybacks, capex spending and dividend payouts, Exxon basically broke even in 2010 and actually had to start tapping into cash reserves or borrow money to fund their deficits. In just five years (2011-2015), the company spent $58 billion more than they received from operating cash.
As we can see, Exxon’s long-term debt has exploded from $6.9 billion in 2013 to $29.5 billion in the first half of 2016. Basically, the company is now borrowing money to repurchase shares or pay dividends. This is not a viable long-term business model.
Investors need to realize that the U.S. major oil industry is in big trouble. If the largest oil company in the country is already suffering, what does it say for the rest of the industry?
This paints a very gloomy picture for the sustainability of the once great U.S. major oil industry, especially when oil prices continue to decline. As was mentioned in previous articles, the Hills Group and Louis Arnoux forecast that within ten years, 75 percent of U.S. gas stations will be closed, and the oil industry as we know it, will have disintegrated.
Exxon Mobil Corp. warned that it may be forced to eliminate almost 20 percent of its future oil and gas prospects, yielding to the sharp decline in global energy prices.
At the end of 2015, the company reported a total of 24.7 billion barrels of oil equivalent. That figure includes oil, liquids and natural gas. However, if we just consider their oil and liquid reserves of only 14.7 billion barrels, a 4.6 billion barrel write down would amount to nearly one-third of their oil reserves. This is much greater than the 20 percent stated in the article.
When Exxon reduces its oil and liquid reserves by 4.6 billion barrels, it will only have 12 years’ worth of reserves remaining, at current production levels. But, what if the price of oil continues to decline toward the $12 maximum price suggested in The Hills Group Report by 2020? What would that do to Exxon or other U.S. oil companies’ reserves and future oil production?
The 100+ year era of the U.S. major oil industry is coming to an end… and fast. Unfortunately, Americans have no clue just how dire the situation has become as many probably still believe in the delusion of “U.S. Energy Independence.”
I would imagine by 2020, the U.S. will be a much different place. Regrettably, most Americans are not prepared.
By Steve Srocco via Peakoilbarrel.com