Exxon Documents Reveal More Pessimistic Outlook for Oil Prices

Source: By Christopher M. Matthews, Wall Street Journal • Posted: Sunday, November 29, 2020

The oil giant has lowered its expectations for prices for much of the next decade, internal documents reviewed by The Wall Street Journal show

An Exxon Mobil complex in Baytown, Texas, in September. Exxon cut its expectations for oil prices for each of the next seven years. Photo: Brandon Thibodeaux for The Wall Street Journal

Exxon Mobil Corp.  has lowered its outlook on oil prices for much of the next decade, according to internal company documents reviewed by The Wall Street Journal.

As part of an internal financial-planning process conducted this fall, Exxon cut its expectations for future oil prices for each of the next seven years by 11% to 17%, according to the documents.

The sizable reduction suggests the Texas oil giant expects the fallout from the coronavirus pandemic to linger for much of the next decade. The fossil-fuel industry is also contending with increased competition from renewable-energy sources and electric vehicles, as well as the prospect of increased climate-change regulation around the world.

Unlike some rivals, Exxon doesn’t publish its internal views on commodity prices, which it views as proprietary. Some investors have pressured Exxon to release them, arguing that the forecasts are critical to understanding a company’s plans and the future value of its assets.

In 2019, Exxon had internally forecast that Brent oil prices, the global benchmark, would average around $62 a barrel for the next five years before increasing to $72 a barrel in 2026 and 2027, the documents state.

This summer, the company lowered that forecast to between $50 and $55 a barrel for the next five years, before eventually topping out at $60 a barrel in 2026 and 2027, according to the documents, which were dated September.

Brent oil is currently trading for about $47 a barrel after a jump in prices this week that has brought prices back to their highest levels since spring.

Exxon’s new price forecast was used at an early stage of modeling its financial plan, which the company’s board was set to vote on this month, according to an Exxon executive. An Exxon spokesman declined to say what its current price projections are, saying that the company uses a range of prices to develop its business plans.

Years of lower oil prices threaten to put further financial pressure on Exxon, which has posted three straight quarterly losses this year for the first time on record, and before the pandemic was in the midst of a plan to spend $230 billion to pump an additional one million barrels of oil and natural gas a day by 2025.

While Exxon doesn’t disclose its forecasts, it has sounded upbeat in public statements about the long-term future for the oil industry coming out of the pandemic.

The company told investors in October that current underinvestment in oil and gas production would leave the world short of needed fossil fuels in coming years. In a note published on Exxon’s website in October, Chief Executive Darren Woods called the industry’s woes temporary and said that the need for Exxon’s products would increase in the near future.

“Even accounting for the short-term demand impact of Covid-19, the investment case is still clear,” Mr. Woods wrote.

Exxon Mobil Chief Executive Darren Woods in Houston in 2017. Photo: Aaron M. Sprecher/Bloomberg News

Stephen Littleton, Exxon’s head of investor relations, said Exxon evaluates capital investment over a decadeslong time horizon, and that the coronavirus hadn’t changed its long-term view. Exxon hasn’t canceled any projects because of the pandemic, only delayed them, he said.

“The fundamentals haven’t changed; the only thing that has changed is timing, because we know populations and prosperity will increase,” Mr. Littleton said in an interview.

Exxon is struggling to cover its dividend, $15 billion a year, at current oil prices, taking on debt this year to do so. So far it has maintained the payout, unlike rivals including Royal Dutch Shell PLC and BP PLC, which have cut their dividends amid this year’s cash crunch.

The company cut $10 billion from its capital expenditures after the pandemic took hold and has said it could lay off as much as 15% of its global workforce, which would total about 14,000 jobs including contract employees. Exxon also said it would reduce its capital budget to between $16 billion and $19 billion next year.

Even with those cuts, Exxon would need oil prices to be between $55 and $65 a barrel in 2021 to cover its capital expenses and dividend, various analysts estimate.

Shell publicly lowered its price forecasts in June, predicting Brent oil would reach $50 a barrel in 2022 before reaching a long-term price of $60. As a result of that revision, it said it would write down the value of some oil and gas assets by as much as $22 billion. BP has also cut its price forecasts and written down billions in assets.

Exxon said in October that it might write down the value of natural-gas assets valued at as much as $30 billion, but said that doesn’t indicate changes to its long-term price views. In recent decades, the company has seldom written down the value of any assets. Executives have for years argued that the company is extremely conservative with its investment decisions, choosing projects that will work financially in any commodity-price environment.

But Exxon’s status as a low-cost operator has slipped in recent years. Biraj Borkhataria, an analyst at RBC Capital Markets, said Exxon’s break-even is the worst among its peers and that, at current spending levels, its oil and gas production is poised to shrink.

Mr. Woods told investors in March that Exxon had stressed-tested a range of commodity prices, including low-price scenarios. If oil prices were to remain around $50 a barrel for years, a scenario Mr. Woods then called unlikely, Exxon’s debt levels would still be manageable.

“I would also tell you, if we found ourselves in this unprecedented environment for five years, we would change our plans,” Mr. Woods said.

Write to Christopher M. Matthews at christopher.matthews@wsj.com