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Commentary: Exxon Mobil Picks a Sour Note to Trumpet to Investors: Gadfly – Liam Denning

February 2, 2018, by Liam Denning

(Bloomberg Gadfly)

Any successful performance requires knowing at least one thing: your audience. Exxon Mobil Corp. seemed to lose sight of that on Friday.

The oil major made news earlier this week with an announcement of a $50 billion five-year investment plan in the U.S. spurred by, in the words of CEO Darren Woods, “historic tax reform.” Even if some of this seemed somewhat repackaged, with Exxon having already laid out big growth plans a year ago in the Gulf Coast and Permian regions, it isn’t hard to imagine this pleased one audience member in particular, residing somewhere in the 20500 ZIP code.

Exxon, of course, isn’t alone in that regard, and $50 billion of investment will be welcomed in the regions receiving it. However, leading with it in Friday’s fourth-quarter results announcement was, if anything, counterproductive:

Exxon Mobil is investing billions of dollars to increase oil production in the Permian Basin in West Texas and New Mexico, expand existing operations, enhance infrastructure and build new manufacturing sites. These high-quality investments will create value for Exxon Mobil shareholders while benefiting the economy, creating thousands of jobs and enhancing energy security.

The problems here are:

Wall Street, so decidedly not warm and unfuzzy, tends not to care that much about job-creation per se or enhancing energy security; Exxon’s U.S. upstream business continues to weigh on the company’s results.

Backing out a one-time benefit of $7.6 billion, the underlying loss, including asset impairments, was $541 million in the U.S. upstream business. This is Exxon’s 12th consecutive quarterly loss in the business that is now at the heart of its investment plans (and messaging).

Even for a company that tends to measure time in decades rather than quarters, three years of consistent losses in the U.S. upstream operation is a problem. Exxon missed earnings estimates for the quarter, and underlying cash flow was flat in a quarter when average oil prices moved up by almost $10 a barrel.

What makes this worse is that competitors seem to be doing better in several respects. Archrival Chevron, for example, made a profit of $358 million in its U.S. upstream business (after backing out tax-cut benefits) in the quarter and was profitable for the year overall.

Earlier this week, ConocoPhillips reported solid results linked explicitly to capitalizing on the rally in oil prices and accelerated its buyback program, the latter conspicuous by its absence in recent Exxon results announcements. Conoco also reiterated a clear and compelling medium-term plan centered on cash returns to shareholders.

Exxon has its own long-term plan for tight U.S. oil that emphasizes continuous productivity gains –to drive down break-even costs — and integration with its refining and chemicals businesses to capture more margin. The plan makes sense and, necessarily, involves a lot of investment.

Equally, though, Exxon is playing catch-up in its U.S. onshore business and has made missteps in the past, notably its ill-timed acquisition of XTO Energy Inc. in 2010. Moreover, the big question still hanging over both Exxon and Chevron is whether the Big Oil model can thrive in shale at scale and actually deliver the return on capital their model demands.

In other words, unlike for much of its history, Exxon doesn’t necessarily get the benefit of the doubt as it makes this multibillion-dollar pivot home. Until it can get the numbers to start doing the real talking, Exxon might want to work on its messaging.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal’s “Heard on the Street” column. Before that, he wrote for the Financial Times’ Lex column. He has also worked as an investment banker and consultant.

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