On August 31, Exxon Mobil Corporation (“ExxonMobil”) (NYSE: XOM) was removed from the Dow Jones Industrial Average (DJIA), signifying the end of an era for the oil giant which has been in the index since 1928
The DJIA index contains 30 companies that provide a broad representation of the market, with the exception of the transportation and utility industries.
There are only a few simple guidelines for the entry and removal of companies from the DJIA.
The report by S&P Dow Jones Indices states, “a [US] stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors.”
In this context, ExxonMobil’s departure from DJIA tells a tragic story of how this vaunted company has fallen from grace.
Year to date, ExxonMobil’s share price has plunged by more than half, from US$70.29 to US$34.74 on 9 October 2020.
Today, we will investigate what led to the downfall of this energy titan and whether there is still light at the end of the tunnel.
The fall of a titan
ExxonMobil’s business consists of three main segments.
The upstream segment handles crude oil and natural gas.
The downstream segment manufactures and trades petroleum products.
The chemical segment provides petrochemicals.
Over the last two years, ExxonMobil’s upstream segment has accounted for the bulk of its earnings.
The company’s cost of production of crude oil and natural gas has been consistent at around US$60 per barrel and US$3.30 per thousand cubic feet respectively.
While ExxonMobil’s cost is managed, we can’t say the same for crude oil and natural gas prices as they are not under the company’s control.
Crude oil prices are at US$41.19 per barrel as of 08 October, while natural gas prices are at US$2.76 per thousand cubic feet as of 09 October.
ExxonMobil’s cost of production for both crude oil and natural gas has been higher than its sale price for the past few months.
Unsurprisingly, the company experienced a net loss of US$1.08 billion in the second quarter of 2020.
This is a stark reversal from the previous year’s second quarter when the company reported a net profit of US$3.13 billion.
Adding insult to injury, the company also has a high debts load of US$69.5 billion and comparatively weak cash and cash equivalents of US$12.6 billion.
ExxonMobil is in a pickle.
In recent years, there has been a downward price trend for crude oil due to a rise in supply coupled with a fall in demand.
The rise in supply can be attributed to increased production from OPEC, the organisation of petroleum exporting countries.
With oil production costs as low as US$9.00 in Saudi Arabia, OPEC can engage in price wars to edge out its competition.
Additionally, OPEC controls almost 80% of the world’s crude oil reserves.
A fall in prices results when the rise in supply is not balanced by a corresponding increase in demand.
The COVID-19 pandemic has made matters worse
As countries shut down their borders, aviation and sea travel for cargo and people has ground to a halt, sharply reducing demand for fuel.
Singapore Tourism Board’s (STB) chief executive Keith Tan recently warned businesses at a virtual roundtable session in September that international travel could take three to five years to recover.
Meanwhile, increased environmental awareness has led to a movement toward alternative energy.
Since April this year, 14 countries have committed to banning internal combustion engine vehicles latest by 2050, with Norway boldly announcing 2025 as its target.
Only nine countries had pledged this goal in 2018.
Just last month, the UK brought forward their fossil fuel car ban goal from 2040 to 2030.
The momentum towards a cleaner globe is set to continue, posing a threat to ExxonMobil’s core business.
The changes might not happen immediately, but the outlook for the decade ahead does not look promising for oil.
The double whammy of increased supply and lower demand has resulted in low oil and gas prices.
The pandemic could spell the beginning of the end for the oil and gas giant.
A tough road ahead
Although the company faces multiple headwinds, it is undeniable that the world will be reliant on energy from oil and gas for some years to come.
As energy-inefficient and polluting as crude oil may be, it is by far the most convenient form of energy.
Once the petrol goes into the engine, the machinery is ready for use.
In comparison, a 40kWh electric car which can travel up to 230km takes 6 hours to charge from empty to full using a 7.2kW charging point.
This difference gives ExxonMobil a few more good years to collect its income.
It would be wise for the company’s management to pivot towards alternative forms of energy while it is still ahead.
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Disclaimer: Zachary Lim does not own shares in any of the companies mentioned.