In its Q1 2021 earnings presentation and conference call, ExxonMobil (Exxon) announced it was doubling down on carbon capture and storage (CCS) in an effort to reduce emissions. “We established a low-carbon solutions business to commercialize and deploy our portfolio of emission reduction technologies,” said Stephen Littleton, president of investor relations and secretary of Exxon. “The new business will initially focus on CCS, one of the critical technologies required to achieve net-zero emissions and the climate goals outlined in the Paris Agreement.”
Exxon continues to address climate change through the oil and gas industry instead of investing in alternative and renewable energy sources. Unlike its European competitors (who are aggressively investing in CCS and renewables), Exxon believes it can meet the goals of the Paris Agreement by investing in the oil and gas industry instead of investing in alternative and renewable energy sources. Simply put, Exxon believes its best use of capital is by making its existing operations more efficient.
Exxon’s strategy is wholly dependent on generating high free cash flow (FCF). The company’s long-term plan is basically to generate gobs of FCF to support the dividend, limit dependence on debt, and then use excess funds to invest in the business and the energy transition. “A strong balance sheet remains a critical advantage in a capital-intensive commodity business. It also provides an important foundation for managing an uncertain future and the transition of the energy sector,” Darren Woods, CEO of ExxonMobil, said during the company’s Q1 earnings call.
The plan sounds great on paper, but Exxon has been saying this for years. To its credit, Exxon continues to raise its dividend even during tough times. The issue is that the dividend payment is now so large that it’s offsetting and often well exceeding the company’s FCF. This obligation makes it challenging for Exxon to invest in its business, let alone emissions reductions.
Like many of its peers, Exxon took a hit from the COVID-19 pandemic, which resulted in negative FCF and rising debt. However, the company’s decision to maintain its dividend instead of cutting it like BP, Royal Dutch Shell, Equinor, and Eni did is clearly taking a toll on its balance sheet.
|FCF||US$5.9 billion||US$14.7 billion||US$16.4 billion||US$5.4 billion||(US$2.6 billion)|
|Total Dividends Distributed||US$12.5 billion||US$13 billion||US$13.8 billion||US$14.7 billion||US$14.9 billion|
|FCF Net Of Dividends Paid||(US$6.6 billion)||US$1.7 billion||US$2.6 billion||(US$9.3 billion)||(US$17.5 billion)|
|Total Net Long Term Debt||US$37.9 billion||US$37.8 billion||US$33.5 billion||US$42.2 billion||US$61.6 billion|
Figure 1. Data Source: ExxonMobil Corporation
Exxon’s New Climate Strategy
Exxon’s new climate strategy is still based on reducing emissions through its existing operations. Between 2016 and 2020, Exxon was able to reduce its greenhouse gas (GHG) emissions by 11%, which is impressive for a company of its size. “We met the methane and flaring reductions we committed to in 2018 and established aggressive emission reduction plans through 2025, putting us on a trajectory consistent with the goals of the Paris Agreement,” said Woods. “We are committed to providing products to help customers reduce their emissions. Across the globe, we’re helping economies decarbonize by providing natural gas for power generation [and] reducing emissions by more than a half versus coal. Our chemical products reduce vehicle weight, lowering transportation emissions, and preserve shelf life of food, reducing waste and agricultural emissions.”
Exxon is working toward reducing emissions in its downstream business, particularly through its fuels and lube products. “We’re also proactively engaging on climate policy,” said Woods. “We’ve demonstrated this through our support for the Paris Agreement and economywide price on carbon, consistent regulations to reduce methane emissions, and frameworks to support investment in carbon abatement. And finally, we’re focusing on developing and deploying scalable technology solutions needed to reduce emissions on a larger scale.”
Aside from CCS, Exxon continues to stress the importance of natural gas in reducing its emissions and creating a more sustainable future. “We’re focusing on the hard-to-decarbonize sectors of power generation, heavy-duty transport, and industrial manufacturing,” said Woods. “We’ve launched our Low-Carbon Solutions business to commercialize technologies and accelerate large-scale emission reductions in these areas. Since 2000, we’ve invested more than US$10 billion in lower emissions technologies and have plans to invest an additional US$3 billion by 2025. Our initial emphasis is on CCS, a technology critical to achieving the goals of the Paris Agreement. I expect the magnitude of investments to grow as we work with industry, governments, and communities to advance attractive project concepts that also generate shareholder value.”
A Difficult Choice
Exxon’s plans to adhere to the Paris Agreement by making oil and gas cleaner instead of investing in renewables makes it the outlier of its peer group. Even US rival, Chevron, is opening the pocketbook and investing in wind energy.
Referring to Figure 1, it’s clear to see that Exxon struggled to generate FCF in excess of its dividend payment even before the pandemic. Looking at 2018, which was a fairly strong year for oil and gas, Exxon paid out 85% of its FCF through its dividend. This is good news for shareholders or retirees who depend on the company’s dividend for supplemental income but bad for the feasibility of Exxon’s long term climate targets.
At least for now, it seems that Exxon’s rising dividend and increased focus on CCS cannot coexist. The company will have to choose if its loyalty lies with shareholders or all of its stakeholders. The data shows that companies who adhere to stakeholder needs by investing in sustainable business practices deliver greater shareholder value than companies who focus solely on stock performance, share buybacks, and dividend raises. Exxon has the potential to develop game-changing technologies for the oil and gas industry. It will need cash to do so or face further weakening its balance sheet.