spent a year preparing an ambitious plan to return
Struggling with laryngitis, the oil giant’s chief executive stepped before a ballroom full of analysts and investors at the New York Stock Exchange in March and unveiled a strategy to spend more than $230 billion to double profits and pump an additional one million barrels a day of oil and gas.
As Mr. Woods walked away afterward and peered at his phone, he received an unwelcome surprise. Shareholders didn’t buy it. “Our stock is down 3%,” he said to another executive, looking exasperated.
Exxon faces a number of challenges, including investigations of its accounting and tax practices as well as lawsuits by cities and states seeking funds to pay for the effects of climate change. Its biggest problem is one the giant has seldom faced in its 148-year history: It isn’t making as much money as it used to.
Under former CEO
Exxon bet big hunting for oil in risky, expensive locales like the Russian Arctic. But as oil prices fell, those projects didn’t pay off the way Exxon had hoped. Now the $350 billion Irving, Texas, company is returning to its old ways: big, disciplined spending on prospects that make money at low oil prices.
The approach is a gamble in a new era of energy breakthroughs such as fracking and electric vehicles. Many of Exxon’s competitors are transforming their businesses to move away from oil exploration, and have begun to spend carefully and diversify into renewable energy.
Investors, who once looked past Exxon’s tendency toward arrogance and secrecy because of its good returns, aren’t sure they want Big Oil to get bigger.
“Most investors like Exxon, but they like other companies better,” said Mark Stoeckle, chief executive of Adams Funds, which owns about $100 million in Exxon shares. “The market is not willing to reward Exxon for spending today in hopes that it will bring good returns tomorrow.”
Exxon has been pledging to produce more oil and gas for years, but its output of about four million barrels a day is no higher today than it was after its merger with Mobil Corp. in 1999. Even if Exxon succeeds in doubling last year’s earnings of $15 billion (excluding impairments and tax reform impacts) by 2025, as Mr. Woods vowed in his eight-year spending plan, it would still be making far less than in 2008, when it set what was then a record for annual profits by an American corporation, at $45 billion.
Exxon’s net income is far less than it was a decade ago, when oil prices were higher.
Oil price (in 2018 dollars)
Sources: FactSet (net profits); EIA (oil price)
In 2016, S&P Global Ratings stripped Exxon of the triple-A credit rating it held since 1930. It was one of only three companies to hold the distinction at that time, along with
While Exxon once ranked as the world’s largest company by market value, it was 10th as of June 30, less than half the size of
Through a spokesman, Mr. Woods declined to comment. Exxon declined to make other executives available for interviews. Exxon has denied wrongdoing related to the climate litigation and other probes it is facing, and insisted the lawsuits are the wrong way to deal with climate change.
The company traces its history back to Standard Oil, the name oil titan John D. Rockefeller gave to his powerful monopoly to signify control, order and uniform quality. The U.S. Supreme Court broke up the monopoly in 1911.
Exxon, the largest descendant of that monopoly, bears a resemblance to Standard Oil even now. While a powerful CEO sets the company’s direction, Exxon is ultimately run by a committee of a handful of executives, dubbed the “God pod” by employees. Much as it was in Mr. Rockefeller’s time, they divide oversight responsibility over Exxon’s vast reach, which now spans 51 countries and six continents and includes more than 70,000 employees.
It became the biggest public company in the world by revenue in 1975, and over the next 3½ decades it was often the most profitable, even when oil prices were low. Exxon excelled in coming through on budget and as scheduled in projects rife with political and engineering complexity.
The company’s process included a painstaking analysis of all decisions, major and minor. Projects were judged based on an assumed oil price often as much as 50% or more below current or forecast prices, according to more than a dozen former employees and executives.
Its leaders confidently steered the company through oil crashes, foreign conflicts and clashes with Wall Street.
Exxon’s boss from 1993 to 2005, personified the swagger at the heart of the company’s ethos. He was notorious for making fun of or criticizing the questions of Wall Street analysts, often to their faces, and he was equally dismissive of some shareholders at annual meetings.
That style rankled some rivals and investors, but Exxon backed it up with best-in-class performance.
Exxon’s shares no longer command the same premium to peers that they did a decade ago.
Premium of Exxon’s price-to-book ratio compared to the average ratio of
*Royal Dutch Shell, Chevron, BP and Total
Exxon’s stock traded at a premium to its peers for decades, a trend that intensified after the company’s purchase of Mobil. Investors at times recognized twice the value in Exxon’s assets compared with rivals BP PLC,
and Royal Dutch Shell PLC.
For years, Exxon “operated like a perfect machine,” said
executive who now runs consulting firm ADI Analytics. “It is a process-driven, extremely disciplined organization.”
About a decade ago, Mr. Raymond was succeeded by Mr. Tillerson, a folksy Texan who came from the so-called upstream side of the business, which explores for and produces oil and gas, and who had a penchant for personally negotiating big oil-production deals himself.
As prices rose to all-time highs of almost $150 a barrel, Mr. Tillerson led the charge to chase more expensive prospects that could meet the world’s thirst for crude. He looked to Canada’s oil sands, natural gas fracking and even Russia’s Arctic, all of which required higher prices to be profitable.
Those efforts largely failed. Exxon’s production has declined in the past five years, and the company has delivered lackluster financial results. Today, oil prices are around $74 a barrel.
Production is no higher than it was two decades ago, despite increases in spending.
Proved reserves (barrels of oil and gas)
Capital spending (dollars)
Production per day (barrels of oil and gas)
Sources: FactSet; Securities filings
Mr. Tillerson, who left in 2017 for a short-lived stint as President Donald Trump’s Secretary of State, produced returns of about 6% a year during his tenure, including dividends—far less than the S&P 500 or rivals Chevron and Shell in that period, according to FactSet. Mr. Tillerson didn’t respond to requests for comment.
In need of a chief executive who could return Exxon to its prior glory—and who could help Exxon confront a multitude of critics and a new energy landscape—the board turned to the 53-year-old Mr. Woods.
A tall, white-haired electrical engineer originally from Kansas, Mr. Woods came up through the ranks of Exxon’s refining division, where profits come from squeezing pennies out of every barrel.
He is an enthusiastic believer in the company’s traditions. In one of his first public presentations as a top executive, given in 2015 to a labor conference in the Dallas area, he repeatedly praised the company’s risk and accountability methodology, known as the Operations Integrity Management System. He mentioned the wonky acronym, OIMS, 13 times in a short speech.
As he prepared to take the reins from Mr. Tillerson more than a year ago, he held a series of dinners with close advisers, according to people familiar with the meetings. At one dinner, he received a query: What if Exxon is wrong in its view of a bright future for fossil fuels? What if the greatest risk to the company is hubris?
Mr. Woods acknowledged the threat the company faces from shale drilling, electric vehicles and climate hawks, according to a person familiar with the discussion. Renewable energy opportunities weren’t yet profitable enough to compete with other Exxon projects, Mr. Woods said. When they are, the company will be ready.
For now, he added, the best way forward was for Exxon to do things the Exxon way.
His faith in Exxon’s process was one of the top reasons he was selected by the board to succeed Mr. Tillerson, according to people familiar with the decision.
Among the company’s recent challenges: Exxon wound up miscalculating the political risks of doing business in Russia, which came under U.S. and European sanctions in 2014, and walked away earlier this year from joint ventures with state-controlled PAO Rosneft to drill for oil in the Black Sea and Arctic waters. Last year, the company was forced to acknowledge that 3.6 billion barrels of reserves in Canada—from an oil sands project that cost more than $20 billion—were no longer profitable to produce.
Another blunder, analysts say, was the 2010 purchase of XTO Energy Inc., one of the pioneers of modern fracking. Exxon bought the company for more than $30 billion, when natural gas prices were higher than they would be at any point over the next seven years.
In the past two years, Exxon has written down the value of its U.S. natural gas assets, which include its XTO unit, by $2.5 billion, an unusual step for the company. In 2015, Mr. Tillerson told trade publication Energy Intelligence that at Exxon, “we don’t do write-downs.”
Exxon’s fracking prospects in the Permian basin in West Texas and New Mexico, developed by its XTO unit, remain among its most profitable opportunities, the company says. Still, its U.S. drilling business has lost money in 11 of the last 15 quarters.
Mr. Woods has taken several steps to shake up Exxon’s insularity, embrace new risks and jettison less profitable areas. People familiar with the matter said Exxon is weighing reducing its exposure to Canada, where it has operated for 130 years. Getting oil from Canada’s oil sands is expensive, and the prospect of reduced exposure has signaled to some advisers that the company may become more aggressive in seeking transformation.
The company is also developing a more robust trading operation with an eye toward using regional oil and gas price disparities in the U.S. and around the world to boost profits, according to people familiar with the process.
Still, the centerpiece of Mr. Woods’s turnaround effort is a major increase in spending, much of which is focused on drilling in Brazil, Papua New Guinea, Mozambique and Texas. In March, he said such opportunities are the best Exxon has seen since its merger with Mobil. They will make it possible for the company to produce an additional one million barrels of oil and gas a day, he said. Combined with existing production, that would equate to five million daily barrels, a record for Exxon.
Next year, Exxon is set to spend $28 billion, 45% more than in 2016. That’s a marked difference from rivals such as Chevron, which is holding investment levels flat this year and 18% below 2016 levels.
Shareholders haven’t responded with enthusiasm. The price of crude is up about 60% in the past year, but Exxon shares are up less than 5%.
Earlier in the year, analyst
then of Wolfe Research, said clients were calling for an activist investor to force the company to take more “radical action.” The unrest has calmed somewhat with oil’s rally, analysts say. But shareholders are still looking for big change.
“Darren Woods is turning the Exxon Mobil supertanker, but the scale of the challenge is giant,” said Mr. Sankey, now an analyst at Mizuho Energy. Exxon is poised to rebound in three to five years, but other companies are better bets for now, he said.
Investors are favoring smaller, nimbler competitors. ConocoPhillips, which has seen its shares rise 60% since last year, shed a number of businesses and promised to distribute much of its excess cash to shareholders in coming years rather than reinvesting.
- Chevron Boss, Not Exxon’s, Was Highest Paid in 2017
- Exxon Pledges to Cut Methane Emissions 15% by 2020
- How Tillerson’s Exxon Designed an Oil Deal to Skirt Anticorruption Scrutiny
- For Its Audience With Pope Francis, Exxon Tries on a New Hue: Green
- Judge Dismisses Climate Suits Targeting Big Oil Companies
From January to March,
the biggest American shale producer, reported higher per-share profits than Exxon, a company five times its size. EOG’s stock is up 84% in the last five years. Exxon is down about 10% in that time.
Meanwhile, rivals such as Shell, BP and Total have diversified outside of fossil fuels.
“Through the ups and downs of oil prices, Exxon always had very high returns, but that has changed,” said
a portfolio manager at Guinness Atkinson Management Inc. It sold out of its Exxon position last year.
—Alison Sider contributed to this article.
Write to Bradley Olson at Bradley.Olson@wsj.com