By Christopher M. Matthews
It has been a stunning fall from grace for Exxon Mobil Corp.
Just seven years ago, Exxon was the biggest U.S. company by
market capitalization. It has since lost roughly 60% of its value,
with its market cap now at around $160 billion, after the pandemic
crushed demand for fossil fuels.
Analysts estimate Exxon will lose more than $1 billion this
year, compared with profits of $46 billion in 2008, then a record
by an American corporation. The company's removal from the Dow
Jones Industrial Average in late August, after nearly a century on
the index, marked a milestone in its decline.
At the heart of the problem: Exxon doubled down on oil and gas
at what now looks to be the worst possible time. While rivals have
begun to pivot to renewable energy, it is standing pat. Investors
are fleeing and workers are grumbling about the direction of a
company some see as out of touch and stubborn.
Two years ago, Chief Executive Darren Woods unveiled an
ambitious plan to spend $230 billion to pump an additional one
million barrels of oil and gas a day by 2025. So far, production is
up slightly since 2018, but the added spending has weighed down the
company, which recently posted two consecutive quarterly losses for
the first time in more than 20 years.
Exxon believes the world's growing population will need fossil
fuels for decades to come and that the company's bet on additional
production will yield profits in the long run. Oil demand has
stalled during the pandemic, but it has been rising for much of the
past century.
Exxon's bets could pay off in the long term if oil and gas
prices go up later this decade and rivals' lack of investment
leaves them unable to capitalize. The company disputed there is
discord within its ranks over its direction.
To address risks posed by climate change, it says it is
investing in new technologies, including those that capture carbon
from the atmosphere or reduce methane emissions, which may help
reduce the impact of fossil fuels on the climate.
"Our portfolio is the strongest it has been in more than two
decades, and our focus remains on creating shareholder value by
responsibly meeting the world's energy needs," said Exxon spokesman
Casey Norton.
The Irving, Texas, company has shed $10 billion or 30% from this
year's capital expenditures, and slowed projects from West Texas to
Africa. Dividends are one reason investors stick with oil
companies. Exxon has had to take on debt to cover its hefty payouts
and some analysts forecast that they may not be sustainable.
Exxon has promised not to cut the payouts, as rivals including
Royal Dutch Shell PLC and BP PLC have done, or take on additional
debt. That has concerned some investors.
"It's one thing to have a lot of confidence and bravado, as
Exxon has for years, but when things start getting as tight as they
are now, and they are tight, how can you not change your stripes,"
said Mark Stoeckle, chief executive of Adams Funds, which owns 1.6
million Exxon shares.
Rivals such as Shell and BP have also begun investing in
renewable energy. In March, Mr. Woods dismissed targets set by
those companies and others to reduce carbon emissions as a "beauty
competition."
Some employees across the company's operations say its style of
management is no longer working in the face of new threats such as
climate-change regulations and competition from renewable energy,
according to interviews with more than 20 current and former
employees.
"While much of your focus has been on a small number of
employees who have left the company, we're proud of our 74,000
employees around the world who continue to work hard during the
ongoing global pandemic, making significant contributions to [the]
company's ongoing efforts to be a market leader," the company said
in a written statement.
While other major oil producers have announced more than 35,000
layoffs, Exxon has, so far, announced none. Exxon is suspending
matching contributions to U.S. employees' retirement plans starting
in October and is conducting a workforce review that may lead to
layoffs.
Employees say changes in the company's internal ranking system
could mean that thousands of workers are already quietly on the
chopping block.
Exxon uses a ranking system to grade employees relative to their
peers. It recently changed its formula, increasing the number of
U.S.-based employees deemed to need "significant improvement" from
at least 3% to between 8% to 10%, according to documents dated
April 2020 that outlined the changes.
Employees with low rankings must choose between leaving the
company with three months of pay, or entering a three-month
probationary period during which they have to meet management
targets or be fired.
Mr. Norton, the Exxon spokesman, said, "We do not have a target
to reduce headcount through our talent management process." He
added that the company is conducting a comprehensive review of
potential cost reductions that could lead to fewer managerial
roles.
Enrique Rosero, a former Exxon geoscientist who left the company
this summer after receiving a low ranking, said he was punished for
asking questions about the company's climate strategy. Mr. Rosero
was ranked among the top third of Exxon's employees two years ago,
according to a document viewed by the Journal, and said he was told
by his supervisor in April that he would receive an excellent
review this year.
During a town hall meeting that month with senior executives,
Mr. Rosero said he asked whether Exxon's acknowledgment that fossil
fuels contributed to climate change was inconsistent with its
corporate strategy. Several other employees said Mr. Rosero had
previously pressed management on such issues.
"We acknowledge the need to reduce our emissions, yet they are
set to increase by at least 20% over the next five years," Mr.
Rosero said during the meeting, according to Mr. Rosero and several
other people who were present. "In the end, wouldn't you agree that
this is a problem of behaviors and leadership?"
Tolu Ewherido, a vice president in Exxon's oil and gas
production business, responded, "I don't hear a question in there,"
according to Mr. Rosero and the others present.
Mr. Rosero said his supervisor told him in May that the exchange
had come up in a meeting and would negatively impact his employee
ranking. In July, his supervisor told him he ranked among the
bottom 10% and was given the choice of taking a three-month
probationary period or 90 days' pay. He took the pay and left the
company on July 21.
Mr. Norton declined to specifically address Mr. Rosero, but said
Exxon's review process is fair and based on annual expectations,
achievements and patterns of behavior. The number of workers in the
"needs significant improvement" category under the company's
ranking system is adjusted on an annual basis and "has been as high
as 10 percent in prior years," he said.
"We encourage an open dialogue and we do not tolerate
retaliation," Mr. Norton said.
Bad bets
Exxon -- the largest direct descendant of John D. Rockefeller's
Standard Oil monopoly -- has struggled through a period of
relatively low oil prices for years due to an abundance of oil and
gas unleashed by U.S. frackers. After missing out on the beginning
of the shale boom, Mr. Woods' predecessor, Rex Tillerson, bet big
on projects around the world that mostly failed to meet
expectations.
Between 2009 and 2019, Exxon spent $261 billion on capital
expenditures, while its oil and gas production remained flat, and
it added $45 billion in debt, according to investment bank Evercore
ISI. Its return on capital employed in 2009 was 16%; last year it
was 4%.
To get into the shale business, Exxon bought XTO Energy Inc. for
more than $30 billion in 2010, when natural gas prices were higher
than they would be for most of the next decade. Large and risky
investments in the Russian Arctic and Canadian oil sands haven't
gone as planned.
To reverse Exxon's fortunes, Mr. Woods returned to the company's
playbook: investing heavily in mega-projects during a period of low
oil prices to catch the upswing. It has spent billions in Guyana
and the Permian Basin.
Even before the pandemic, some of Exxon's growth plans in Texas
were viewed as unrealistic by some workers, according to current
and former employees.
In March 2019, Exxon said it would increase oil and gas
production in the Permian Basin to 1 million barrels per day as
early as 2024, up from previous estimates of 600,000 by 2025. Some
staff assigned to the project thought that was overly optimistic,
said six current and former employees.
For one area called the Delaware, some Exxon managers in 2018
had initially pegged the net present value of those holdings at
about $60 billion, according to several employees.
Some involved in the project estimated last summer that the
area's net present value was closer to $40 billion because they
believed Exxon was overestimating how quickly it could drill,
according to the people. After additional debate and consultation,
the value was adjusted to about $50 billion, said the people.
Exxon disputed there had been a significant disagreement over
the valuation. The company's "annual planning process considers
multiple inputs from multiple working groups across a wide range of
complex technical areas," and it is often the case that some
experts and managers initially have different views, it said.
In response to the pandemic, Exxon has cut spending in the
Permian and lowered its production estimates in 2020 to around
345,000 barrels per day. Prior to that, it was on track to meet or
surpass its long-term growth goals there, it added.
"We reject the claims made by your sources who, based on their
comments, have an inaccurate, incomplete and dated perspective of
resource and development plans," Exxon said in a statement, saying
it exceeded the 2019 plans. "Actual performance has proven that
their position is inaccurate."
Fossil fuels
While rivals such as Shell and BP have begun hedging their oil
and gas bets with investments in renewable energy, Exxon has
remained largely committed to fossil fuels.
In the 1960s, Exxon created an in-house venture-capital division
that helped develop some of the first commercially viable solar
cells before selling the unit in the 1980s, determining oil and gas
were more profitable. Several employees said the company has chosen
to primarily innovate on oil- and gas-related technology.
"ExxonMobil is a world leader in carbon capture," the company
said.
Mr. Woods has said Exxon is investing in groundbreaking
technology, including algae biofuels and capturing carbon. He has
also emphasized company traditions, including its employee-ranking
system, that he believes have made Exxon successful.
In early 2018, around the time he laid out his growth plan, Mr.
Woods visited the company's flagship Houston-area campus for a town
hall meeting. He spoke to more than 1,000 employees in the campus'
main building, which features a 10,000-ton "floating cube" that
appears to hover over a plaza below.
When the meeting shifted to a question-and-answer session, some
employees asked about the ranking system and whether Exxon would
ever get rid of it, said six people who attended. Many large
companies have abandoned such rankings, including Microsoft Corp.
and General Electric Co., which pioneered the system in the
1980s.
Mr. Woods appeared annoyed by the question and said Exxon would
never get rid of the rankings, according to the people.
"We need to win in the marketplace," Mr. Woods said, according
to the people.
Write to Christopher M. Matthews at
christopher.matthews@wsj.com
(END) Dow Jones Newswires
September 13, 2020 19:05 ET (23:05 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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