How One Terrible Year Changed Exxon

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With a month to go before a showdown with activists at its annual meeting, Exxon Mobil Corp. is putting its best face forward.

The activist argument rested on two pillars. First, Exxon’s strategy for managing the energy transition was, at best, unclear and at worst barely in existence. Exxon has moved to defang that with a shift in messaging around long-term energy demand, creation of a carbon-capture business, and appointment of a less demanding activist, Jeff Ubben, to the board. Second, Exxon’s financial results, and stock performance, had slumped, especially relative to its storied past. On Friday, Exxon came out swinging with first-quarter results.

The biggest improvement was in the areas Exxon needed it most: cash flow and leverage. Free cash flow of $6.6 billion covered dividends for the first time since the fall of 2018 and was higher than for the prior nine quarters combined. Exxon used that extra breathing room to trim its swollen balance sheet; net debt fell by $3.4 billion.

Such numbers confirm the already very strong likelihood that Exxon will win its proxy battle next month. Yet they also demonstrate how much the fight, along with the ordeal of Covid-19, have changed the company.

Just before the activists showed up late last year, I wrote that Exxon’s high-spending and borrowing had turned its stock into a leveraged oil-price play — one among many instead of leader of the pack, in other words. Still, that helps when crude oil prices and margins (especially in the chemicals business) are going the right way, as they have been so far this year.

How One Terrible Year Changed Exxon

Similarly, cash flow was boosted by the biggest release from working capital in two years, equivalent to 30% of free cash flow. Meanwhile, cash capex of $2.7 billion was less than half the level of a year ago and the lowest for any quarter in many years, also flattering that free cash flow figure. Perhaps more than anything, Exxon’s sources and uses of cash illustrate the strategic u-turn over the past year from leaning on the balance sheet to support heavy investment to retrenching and defending the dividend.

How One Terrible Year Changed Exxon

Much remains to be done, of course. Annualized, return on capital employed of around 5% is an improvement but still too low. The reduction in debt was a welcome surprise, but net debt to capital fell by only about one percentage point; at 27.6%, leverage is still high.

Looking ahead, Exxon can’t count on chemicals margins staying close to decade highs or further big working capital tailwinds. Unlike rival Chevron Corp., which just raised its dividend and faces calls to restart buybacks, Exxon’s payouts look set to stay flat for a while yet, barring further strength in commodity prices. It’s early days, however; Exxon’s strategic shift is only months old. Structural cost cuts, which added a billion dollars to earnings in the latest quarter compared with last year, should continue.

Most of all, though, it’s simply striking how the trials of the past year have changed Exxon, not just in how it deploys capital — which defines a company more than anything — but also its messaging. Let’s be clear: the new low-carbon business is entirely a “show me” story for a company like this. But the mere sight of Exxon calling for a giant carbon-capture project in Texas, with help from the federal government no less, shows how the world is impinging on this previously most aloof of institutions. Not much will change at that meeting in a few weeks, but much has already.

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

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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