Exxon reduces Capex by 30%

ExxonMobil announced on Tuesday that the oil giant will reduce its capital spending by 30%. Edward Jones Senior Equity Analyst Jennifer Rowland shares the details.

Video Transcript

JULIE HYMAN: I want to turn to Exxon Mobil because the oil giant made a significant announcement today. It said it was cutting 30% of its capital expenditures. That amounts to about $10 billion. To discuss that, we're joined by Jennifer Rowland. She is Senior Equity Analyst at Edward Jones and frequent guest of the program.

So, Jennifer, this is, obviously, a big move. Something interesting, though, about it is that the company still plans to raise production in the sort of shale-heavy areas in the United States. So what do you make of this announcement? Is this what Exxon Mobil needed to do?

JENNIFER ROWLAND: I think it's absolutely what Exxon needed to do. I mean, their capital spending program had been much larger than their integrated peers. So they had a lot more room to cut. And I think it's a very welcome move by investors. You can see that today in the stock price reaction to get this pretty significant 30% haircut to capital spending plans for 2020.

To put that in context, most of the other larger integrated companies have announced CapEx cuts anywhere from 20% to 25%. So, definitely, a higher move than its peers. But I think a-- one, a very welcomed move and a much-needed move.

ADAM SHAPIRO: How long can they protect their dividends, not only Exxon Mobil, but the other big oil companies?

JENNIFER ROWLAND: Yeah, I get that question all the time. And I think at the end of the day, when you think about the way the integrated companies, their business models are really built to withstand this kind of commodity price, not only volatility, but the weakness that we see in the absolute level of commodity prices. Obviously, no one's enjoying a low oil price. No one's profitable at this level. But these companies like Exxon, Chevron, Shell, they're really built to withstand it because they've got very strong balance sheets.

And they can use their balance sheet during commodity price weakness, kind of lean on them. Obviously, leverage will increase during this period. But when they get to the other side of it and the cash flow returns, they can quickly get the leverage back down. And so we're pretty comfortable across the board with the dividend.

I would say the same for Exxon. When you start to talk about some of the smaller producers, some of the E&P companies, I think there, we will continue to see dividend cuts. We've already seen quite a few. And I would expect that to continue with the smaller producers.

JULIE HYMAN: And, Jennifer, there does seem to be sort of a growing conflict between the Exxon Mobils of the world, who are maybe going to produce less from shale this year than they expected, but still an increase, and the smaller producers, which are arguing maybe more for trimming of output or capping of output of some kind. Coming out of this, are we going to see-- because of what you're discussing-- sort of a consolidation of power or of strength among those larger producers at the disadvantage of the smaller?

JENNIFER ROWLAND: I think that's definitely a potential outcome in here. Of course, the big question is how long commodity prices remain this weak? A lot of it will hinge on how quickly we're able to recover, globally, from the coronavirus and the impact that's had on travel demand and, obviously, just the cratering that we've seen for jet fuel and gasoline, as no one's going anywhere.

So that's, obviously, one big question mark. And, of course, the other big question mark is what Saudi and Russia decide to do or not do in here is on the supply side. So a prolonged period of price weakness, I think, will drive a lot of smaller producers out of the market and, potentially, put that-- their rocks and their production in the hands of stronger, better capitalized companies. Obviously, we like the integrateds, again, because of the strength of their balance sheet.

JULIE HYMAN: What do you think will happen on the OPEC-Plus front, on the Russia Saudi front later this week?

JENNIFER ROWLAND: You know, it's going to be very interesting to see what they decide to do. There's, obviously, been a lot of rhetoric here on the last couple weeks and kind of getting mixed messages. On one hand, both Saudi and Russia making comments that they want to move towards agreement. But then also at the same time, blaming each other for the carnage we've seen. I think what's interesting is that both of them seem to be in agreement on one thing, which is they want the US along for the ride and for the US to take part in production cut agreements.

That's, to me, the really-- the tricky part in all this. I don't know how you get the US, which is made up of hundreds and hundreds of producers, to be able to participate in a production cut. And, of course, the US can't, you know, agree to act with a cartel. That would be against anti-trust rules. So I think that's the real tricky piece of this, is how do you get the US along?

Obviously, a low oil price will just, inherently, result in less production coming out of the US, without having to try to force that or mandate that. But I think that's the real wildcard in here. So hard to say. But I think also the bigger issue is the demand loss at this point is so significant, that even if we get some kind of agreement out of Saudi and Russia and the rest of the OPEC members, it's probably going to be a drop in the bucket compared to the amount of demand that's being lost at this point.

JULIE HYMAN: Good point. Jennifer, thank you for your time. Jennifer Rowland, a Senior Equity Analyst at Edward Jones, appreciate it.