Big Oil, Big Writedown

Source: CNBC.

Once the world’s most valuable company, the largest US oil producer ExxonMobil finally admitted its struggling situation.

Big picture: On Monday, oil giant ExxonMobil announced its plan to write down up to USD 20 mln natural gas assets in Argentina, the US, and Canada, marking Exxon’s largest impairment in history. This brought Exxon’s share price down by 5.1% overnight - sounds not positive 🤔

  • Industry wise, the impairment could also be the largest since BP’s 2010 oil spill.

Accounting time: Impairment usually happens when the market value (usually calculated by discounted cash flow) of an asset is lower than its Balance Sheet value. You then need to adjust the difference. 

That’s exactly the situation here. In 2010, Exxon acquired XTO Energy for more than USD 35 mln with a bright future as the booming gas demand outpaced supply. But in reality, XTO’s natural gas operations suffered from depressed prices as a result of a supply glut.

  • In fact, Exxon’s former CEO Rex Tillerson admitted that they overpaid for the transaction. But he admitted that in 2019, way too late...

Covid is still not away. To save more money, Exxon also adjusted its capital spending plan to USD 25 bln (from 35)  in the next five years, along with a 15% global workforce layoff. All of these are to ensure a “reliable dividend”.

Is it a good time to be an oil major?

Perhaps not. Just last week, Exxon had internally forecast lower oil prices for the next 7 years of up to a decline of 17%.

  • That looks to be the case - OPEC has just deferred its decision on continued supply cuts in 2021, as key players haven’t reached an agreement on how much oil they should pump in 2021.

Exxon has reported losses for 3 consecutive quarters this year, while its stock has declined 40% YTD to a 18 year low and was removed from the DJIA in August. Will this ensure its survival?

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