Nine years ago, Exxon Mobil was the most valuable corporation in the world.
Last week, Dow Jones removed the stock from its industrial index that is supposed to represent the U.S. economy. Exxon’s market capitalization has dropped from $400 billion in 2011 to just $175 billion today, and the oil business is no longer as important to the U.S. economy.
Oil executives talk a lot about how their industry will bounce back after the coronavirus pandemic passes, but the truth is their business is in long-term, secular decline. No matter who wins November’s elections, we need to find new businesses to replace the oil and gas industry in Texas to avoid economic decay.
The coronavirus has undoubtedly accelerated a process set in motion and sustained by the fight to mitigate climate change. Travel restrictions and work-from-home orders have decimated demand for oil, and most analysts don’t see a return to previous consumption levels until a vaccine is widely available.
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Shale oil companies, notorious among investors for promising huge returns and rarely delivering, are going bankrupt by the dozens. Most cases are structured to allow the company to keep operating, but the financial losses to banks, bondholders and investors are very real.
The corporations we anachronistically call Big Oil are in only slightly better financial shape. These vertically integrated companies are supposed to be reliable investments because they drill wells, own pipelines, refine crude and sell fuel, giving them multiple opportunities to profit.
For decades, Big Oil has promised to construct capital-intensive projects that pay out-sized profits for decades, thereby guaranteeing reliable dividends to shareholders. But new technologies and low oil prices have scuttled that business plan and triggered Exxon-style shrinkage across the sector.
In early summer, Shell wrote off $16.8 billion in assets, BP slashed the values of its assets by $11.7 billion, Total cut them by $8.1 billion and Chevron said it was worth $4.8 billion less than at the beginning of the year.
Those four companies, plus Exxon, still managed to pay dividends to shareholders, but only by borrowing money or selling assets. The five supermajors paid out $16.9 billion more in dividends than they generated from their core business operations, according to the Institute for Energy Economics and Financial Analysis, a nonpartisan think tank.
Paying out more than you make is unsustainable, and investors have punished energy companies as a result. While the broad S&P 500 index of top corporations is up 6.6 percent for the year, the energy sector is down 40 percent. Energy was the worst performing sector in 2018 and 2019, too.
Old timers like to say the oil business has seen bad times before, and that every bust is followed by a boom. Just wait until the current oil glut gets used up. Or give OPEC time to get greedy again. Once the price of crude jumps, Texas will be rolling in money again.
You know who used to talk that way? Coal company executives.
“We are at the early stages of a long-term supercycle for global coal demand with hypergrowth being driven by soaring energy needs,” Gregory Boyce told the 2011 CERAWeek energy conference in Houston. As chairman and CEO of Peabody Energy, the world’s largest private-sector coal company, he scoffed at the idea that natural gas would supplant coal in electricity generation.
Coal’s energy density, ease of transportation and the huge amount invested in power plants guaranteed the black rock’s prosperous future. Doesn’t that sound a lot like the oil industry talking points?
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Peabody filed for bankruptcy in 2016, emerged in 2017 and lost $1.5 billion in the second quarter of 2020. The company in June wrote down the value of its North Antelope Rochelle Mine in Wyoming by $1.42 billion.
U.S. coal production is down to levels last seen in 1978. Natural gas has supplanted coal as the prime generator of electricity and American power plants consumed a record amount last month, according to the Energy Information Administration. Coal production is down about 25 percent compared with last year.
While European oil company CEOs have announced plans to transition from oil to natural gas and eventually to climate-friendlier forms of energy, the American oil industry continues to demand government bailouts and protections. Coal companies did the same, and look where they ended up.
Happy talk will not save the oil industry; the best we can do is manage the long-term decline. The Texas economy relies too much on oil companies, and unfortunately, so do Texas politicians. We all need to recognize that innovation, not regression, is the path to prosperity.
The global energy transition is underway, and the mighty may fall quicker than we expect.
Tomlinson writes commentary about business, economics and policy.
twitter.com/cltomlinson
chris.tomlinson@chron.com
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