It’s no secret that it has been hard for investors to make big profits in the oil and gas sector in recent years. Oil stocks haven’t exactly screamed higher when oil rises, but the shares seem to love selling off on any sort of news they can find. Exxon Mobil Corp. (NYSE: XOM) is the king of oil and gas in America, with close to a $300 billion market cap. The problem is that the stock is still down over 30% from its peak of 2014, and many investors refuse to touch fossil fuels, whether or not they are deep into the ESG (environmental, social, governance) theme.
If things do not change drastically, the Exxon of the next decade almost certainly will look and act like a very different company than its investors have previously thought of it.
Several changes and developments are starting to take shape that will be rather different for investors ahead. Major asset sales around the globe, a shift in production in North America, a focus of looking closer to home, some credit concerns, and dividends and buybacks are all up for discussion.
The first thing to note, with or without change, is the colossal failure that Exxon has been for investors in recent years. The good news for Exxon is that it has been gearing down its liabilities and long-term debt, and at least the oil and gas giant can claim that its losses were nowhere near as bad as the second-tier and third-tier players. That said, investors in this stock have still felt punished. Several developments are underway, and it’s up to investors to decide if this will work well or just lead to another decade of stagnation.
A Reuters report signals that Exxon will be selling off most of its upstream assets in Europe and will just keep a stake in the Netherlands operations. Other asset sales are said to be coming for Asia and Africa. All combined, the capital being brought back may amount to $25 billion. And prior communication from Exxon for longer-term divestitures or sales was up to $25 billion by 2025.
Now Moody’s finally has made a credit rating action on Exxon. The agency has changed its credit outlook to Negative from Stable. This matters because Exxon is currently one of the few remaining Aaa credit ratings in all U.S. corporations. The Moody’s report cited the company’s substantial negative free cash flow and expected reliance on debt to fund its large growth capital spending program, and it forecasts that the company’s debt will rise despite some potential mitigation from asset sales.
Moody’s sees Exxon’s credit metrics softening over the next few years. Negative free cash flow will be around $7 billion in 2019 and $9 billion in 2020, per the report, with a target of $60 per barrel of Brent crude. The report also went on to say that negative free cash flow is likely to continue in 2021, as its growth capital investments cannot be funded with operating cash flow and asset sales at projected levels based on Exxon’s substantial dividend payout at current commodity prices. Also cited in the report are environmental considerations, natural and manmade hazards, social risks, rising litigation risk around climate change, carbon taxes, future laws and regulations, corporate governance considerations and a shift in global demand toward other sources of energy and conservation. All in all, Moody’s opined that its expectation for weakening credit metrics could result in a credit rating downgrade in 2020.