After weak Q1, ExxonMobil (XOM) plans cost-reduction to beat demand woes

All the leading oil companies have slashed production after industry leading energy explorer ExxonMobil (NYSE: XOM) incurred a loss in the early months of the fiscal year as crude prices continued the free-fall. Recently, prices plunged to a record low, with the coronavirus outbreak weighing on demand and sending the industry into a tailspin.

ExxonMobil Q1 2019 Earnings Infographic

After the initial lull, meanwhile, there was a modest recovery in output amid hopes of the Russia-Saudi standoff easing, but the supply glut continues to take a toll on the industry. According to market watchers, it might take more than a year for demand to return to the pre-crisis levels. 

Stock Falls

ExxonMobil’s shares recently slipped to the lowest level in about 16 years, after falling steadily since the beginning of the year. However, the stock shifted to recovery mode as the management’s decision to keep the dividend intact – despite the unimpressive cash position – brightened investor sentiment.

Investing in XOM

Though the low valuation makes ExxonMobil an attractive investment option, market watchers are skeptical about the prospects of a full-fledged rebound, and recommend holding the shares. The stock closed the last trading session notably higher.

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The Irving, Texas-based energy giant report a loss of $0.14 per share for the first quarter when the effect of lower expenses was more than offset by heavy markdowns related to oil price – after recording profit consistently for several decades. Revenue dripped 12% to $56 billion, hurt by falling economic activity and the resultant slump in demand.

Cost-cutting

Earlier, the management announced a 30% cut in full-year 2020 capital spending and a 15% cut in operating costs, so as to compensate for the fall in demand and revenue loss. The focus of the capex reduction is the resource-rich Permian Basin. Recently, rival oil company Chevron Corp (CVX) also revealed plans for a major capex cut, after reporting a sharp fall in first-quarter sales.

ExxonMobil’s weak first-quarter outcome was widely expected. Output will drop further in the second quarter and margins will remain under pressure due to the demand crisis. While a recovery is inevitable, the company’s CEO Darren Woods believes it is going to a slow one. He is prepared for a “low price and margin environment through year-end,” which indicates the current headwinds would persist until next year. 

“You’ve got to continue to invest in industry advantaged accretive projects if you’re going to sustain a strong foundation to support the business going forward, a successful business, to support a growing and reliable dividend and to maintain a strong balance sheet. So, the projects investments are critical foundation to the long-term health of the business.”

Darren Woods, CEO of ExxonMobil

During his interaction with analysts at the earnings conference call, Woods expressed hope that situations like the one at hand usually do not change the basic human nature of wants and desires. So, once there is a reasonable improvement in people’s standard of living, the demand for energy would increase.

Long-term Prospects

The complexity of the situation is a real cause for worry, though it is certain that demand would improve when economic activity picks up. In the long term, it is expected that energy consumption would grow by 20% in the next decade, with oil and natural gas accounting for about half of the requirement.

“As we reach the fourth quarter, we expect demand will be below last year due to lost economic activity. Of course, there’s a lot of uncertainty on the timing of the recovery. We’re planning for a slow one as it takes time to restart businesses and for consumers’ confidence to grow. Hopefully, it happens faster than we think” added Woods.