|September 08, 2020|
Big Oil just isn't as big as it once was
|A dozen years ago, ExxonMobil was the bluest of blue-chip companies. Raking in record-breaking profit, it spent every quarter of 2008 as the world's most valuable publicly traded company.|
Not anymore. The oil giant's market value today is about a third of what it was in 2008, when it approached $500 billion. That slide culminated last month with Exxon ending its 92-year run on the Dow Jones industrial average.
The removal of the longest-serving component of the U.S. stock indicator --- Exxon joined in 1928, when it was known as Standard Oil of New Jersey --- is just the latest sign of the decline of oil as major driver of the U.S. and global economies.
Pummeled by the coronavirus pandemic, which has stopped travel in its tracks and sent oil prices to historic lows, the energy sector became the smallest component of the S&P 500-stock index this summer after dipping below utilities, real estate and materials.
The departure from the Dow, while symbolic, is more the result of the economic shift toward the tech sector and away from energy that has accelerated during the pandemic.
Today, oil and gas companies constitute just 2.3 percent of the S&P 500, down from more than 15 percent in 2008. Similarly, oil and gas made up about only 4.2 percent of the European stock market at the end of July.
The slide has been so steep that today five technology firms --- Alphabet, Amazon, Apple, Facebook and Microsoft --- are each worth more than the top 76 energy companies combined. (Amazon chief executive Jeff Bezos owns The Washington Post.) The Dow dropped Exxon for yet another tech darling, the cloud computing company Salesforce.
Exxon and a half dozen or so of the world's largest oil companies --- so-called Big Oil, though that's an increasingly outdated term --- just aren't that big anymore.
"Oil has shrunk as part of every economy, not only the U.S.," said Pavel Molchanov, an energy analyst at ‎Raymond James. "This is a global trend."
Even as some stay-at-home orders are lifted, apprehension about traveling during the pandemic may continue to weigh on demand for oil until a safe and effective vaccine is readily available.
During what are normally busy driving months of April, May and June, BP lost $16.8 billion, Exxon netted $1.1 billion in losses and Chevron --- the Dow's last remaining oil firm --- shed $8.3 billion.
"I don't think we know how this is going to play out. I certainly don't know," BP CEO Bernard Looney told the Financial Times in May. "Could it be peak oil? Possibly. Possibly. I would not write that off."
The supermajors that were able to turn a profit were still off the mark from the previous year. Total and Royal Dutch Shell saw a second-quarter profit of $126 million and $638 million, respectively --- a more than 80 percent decline from 2019 for each.
Big oil companies are borrowing money and selling assets to maintain dividends prized by investors, though those payouts create an untenable cash flow. According to the Institute for Energy Economics and Financial Analysis, those five oil majors spent $16.9 billion more on dividends and stock buybacks than they generated.
Next year likely won't be much better for oil demand than this one. The International Energy Agency cut its most recent estimate for global oil demand in 2021 by 240,000 barrels a day, to 97.1 million barrels a day, with an expected stagnation of air travel being "the major source of weakness."
In the power sector, natural gas now accounts for more than a third of U.S. generation after years of eating into coal's share of the electricity market. But the fuel is too cheap and abundant due to the boom in fracking to turn a big profit.
"For those companies that are selling both oil and gas, oil has often been the more profitable product," said Ethan Zindler, an analyst at Bloomberg NEF.
It was only a few years ago when new techniques for coaxing oil and gas out of the ground transformed the United States into an oil-producing juggernaut. Driven by domestic petroleum prices above $100 a barrel, the fracking revolution spurred a surge in extraction jobs in Texas, North Dakota and Pennsylvania, peaking at a total of more than 200,000 industry positions nationwide at the end of 2014.
But as prices dropped and companies automated jobs, sector employment declined to 158,000 last December, according to the Bureau of Labor Statistics. The pandemic, which briefly pushed the price of West Texas Intermediate crude into negative territory for the first time ever, has only led to more layoffs.
Even after the viral outbreak passes, oil companies will still be under intense pressure to curtail emissions from their core products as investors, consumers and politicians grow increasingly concerned about catastrophic climate change.
Although electric vehicles represent just a fraction of auto sales, investors are pouring money into Tesla --- while General Motors, Ford and other traditional automakers prepare their own electric fleets --- in the expectation that buyers and regulators are ready to make the internal-combustion engine a thing of the past.
"Stocks reflect expectations for the future," Molchanov said.
The European Union is aiming to cut its climate-warming emissions to net-zero by 2050. On this side of the Atlantic, Democratic presidential nominee Joe Biden wants to renew incentives for the purchase of electric cars and eliminate carbon pollution from the electric sector by 2035.
President Trump likes to boast that, under his watch, the United States has become the world's No. 1 oil and gas producer.
But even if he wins reelection in November, the future of making money off oil looks bleak if prices hover around $40 a barrel. Such low prices limit exploration in the Gulf of Mexico and the Alaskan Arctic, where petroleum is plentiful but drilling costs are high.
Amid all the strife, some supermajors could come out of the recession with more assets than ever. In the oil business, contraction is often followed by consolidation. The market tumult has made smaller firms vulnerable to being scooped up by bigger players. Chevron has already acquired Houston-based Noble Energy in a $13 billion deal in July.
Big oil companies, Zindler said, are still a "very meaningful and important part of the economy, regardless of where the stock is trading at the moment."