Friday, 9 October 2020

Decline and Fall of Exxon

What a story.  Exxon, once the greatest corporation in the world, now struck out of the Dow Jones Industrial Average and eclipsed in market cap by a wind-farmer!  OK, every traditional energy stock has received a smacking this year - some reckon that 2019 will prove to have been 'peak oil' - but Exxon stands out from the Shells, BPs, Chevrons and Totals as having been in slow and steady decline for years before that. 

This is the firm that was the triumphant main survivor of the anti-trust purges against the Rockefeller / Standard Oil empire; that for decades managed its stock price carefully through a strategic buyback scheme, so that every pension fund in the USA had more Exxon in it than anything else.  That was AAA rated long after that became a distant memory for industrials.  That was totally self-confident in its own strength and abilities; that would blithely flout US sanctions if it chose**; that had every bank in the world at its beck and call; that remained magisterially above the hurly-burly of politics, domestic and foreign (until Russia expropiated some of its stake in Sakhalin, to the company's utter amazement: that's the kind of thing that happens to the others, but not us!).

What happened?  

It certainly wan't a single bad decision.  I know Exxon well, having dealt with them at length in several different manifestations.   On the one hand, they were (let's start in the past tense) totally confident in their own abilities.  They never recruited from outside: everyone started at the bottom of the Exxon pyramid, and at each successive layer a few more would drop off.  Management were trained to be generalists in a laudable programme of assignments to widely varying divisions.  If you'd never worked in the corporate treasury, that was a very good reason for being given a role there for your next job.    For this to be feasible, numeracy was the primary requirement; and training needed to be superb.  In technical subjects, it was.  There was an Exxon way of doing things, in almost every sphere.  By dint of the 'no external recruiting' principle, nobody knew any different anyhow.   By its own lights (share price, credit rating, ability to take on global mega-projects only Shell could match), this all clearly worked superbly well.  If you liked being in a competent, well-resourced, confident, and hence relaxed environment, you could have a very happy career.    

The downside?  Well, arrogance, natch.  And total insularity.  Exxon had no idea what it didn't know.  Like, absolutely none whatsoever.  This even included what else was going on in the oil industry, if Exxon didn't participate in a particular corner of it.  This extended to what were the lastest technical breakthroughs, if Exxon hadn't been involved.  (I was once set on, as an outsider, to conduct a formal enquiry into a vexed distortion in the UK oil taxation regime and the various ways most companies were finding to dodge around it: HMG wanted to straighten it all out.  I was invited to interview any executive in any company I chose and - on the strict basis of 'no names mentioned' - demand full candour from them.  This was forthcoming, and we bottomed out the loophole issue quite easily.  Exxon, naturally, insisted on being one of the interviewees (fair enough): they sat me down and earnestly assured me, with transparent good faith, that nobody in the industry was dodging anything at all, and the whole thing was a big misunderstanding.  Well, they certainly weren't dodging; they showed me their books.  They had absolutely no idea what the rest of the oil patch was up to.)

A subsidiary failing was their total lack of interest in entrepreneurial activity.  They made their money by being (as they saw it) the best engineers with the biggest balance-sheet, who could thereby command a monopoly on the biggest and most lucrative challenges / opportunities in energy.  Anyone piping up with a smart idea for making a few extra bucks was told to get back to their desks: too small to be of interest.  That's an attitude that corrodes the spirit of many of the brightest and best.   

Well, they've had a good run: but for years now it's become obvious this introspective giant was going to stumble really badly if the world moved on.  They'd never realise what was happening outside their frosted windows, for one thing.  And when the need came for nimbleness?  Forget it.  (There was once an Exxon CEO who said he was going to "teach the elephant to dance".  No chance.)  Two years ago they announced they were going to get seriously into trading - as had, for very many years past been Shell, BP, Chevron, Total ... et al, ad infinitum.  What: a massive oil company, not in trading?!  Yup.  Trading was evil.  If you give the toys to the boys, the boys will play with the toys; and then where would we be?  Nope, we'll be self-sufficient, thank you very much.  Well: try changing course in a volatile, fast-evolving commodity market without a good trading division.  Can't be done.  Needless to say, their new efforts have made no impact.

If the world moved on ... and so it has proved.  Exxon is now pretty paralysed, with most discretionary expenditure frozen while they figure out what the Hell to do next, as the rest of the western world heads along different paths towards Net Zero 2050.  (You can see them thinking:  the world will still need oil ... maybe there's a niche for just one unreconstructed old dinosaur ...) Their credit rating is still AA - albeit having been downgraded this year by both S&P and Moody's, and with negative outlook - so there's never any problem raising $$$.  They might still lash out on something left-field (like in the 1980s when they decided to beat IBM at office systems - sic ++).  

Chances of success?  Pretty low.  Still, it's a big corpse for many a vulture to feed off (see footnote) over the coming years.  My name is Ozymandias ...


Update:  I found the "elephant dance" story online


**  yet again, a story for another day (perhaps when the corpse has been interred)

++ from wiki, the story of a highly instructive $1bn Exxon cockup of old: 

Under the guidance of its paid consultants at Boston Consulting Group, Exxon announced in the 1970s, that it would compete against IBM and Xerox. The mantra was ‘Information Is the Oil of the 21st Century’. It launched Exxon Office Systems, which predictably failed, since "the giant oil company failed to fully realize the subtleties of managing small high-tech companies." In the early 1980s, Exxon retailed its fax machines and software through Sears. Exxon announced the closure of the venture at the end of 1984.


dearieme said...

'their total lack of interest in entrepreneurial activity': that used to drive me mad with big companies. "Not for us; overheads, you know".

Ah, I would say, you mean that we lack the managerial skills to manage a small enterprise?

The sensible answer would have been "yes" but instead people just bridled. As my father warned me, big businesses are often run by people who just aren't businessmen.

Nick Drew said...

big businesses are often run by people who just aren't businessmen

that's a great saying, and so true. You always expect any big organisation to be full of people who, inevitably, can't see the whole picture or how the thing really works. But you're right, that blindness on fundamentals reaches distressingly high in many firms. Of course, many C-suites like to keep it that way. They don't want the average shareholder to understand too much, either - see any published Annual Report, most of which are devoid of insight, if not actually containing outright lies.

(touchstone is often the Risk section. It cuts both ways: sometimes, somebody who actually understands the business feels the need to cover their arse by sketching out where the real flaws are in the business model - but there are standard ways of encrypting the risk statement to make it sound anodyne.

on the other hand, they often lie through their teeth. Almost every company in the energy space - outright EnCo's, and large energy buyers - states "we do not speculate in commodity markets". Half a day of forensic audit of the business model frequently gives the lie to that)

david morris said...


a very interesting & pertinent article

End of days (for some) indeed

James Higham said...

When they have something rolling along fine in their eyes, very difficult to imagine a reimagining of the future by others. Fascinating.

Unknown said...

Perhaps not End of Days, but end of the 20th Century.

If they made a fundamental mistake, it was to think they were selling oil, when really they were selling energy.

Don Cox

Nick Drew said...

what a great phrase, James

very difficult to imagine a reimagining of the future by others

(= for the democratic politician, salesmanship is everything)

Nick Drew said...

Don - funnily enough, they'd seen that one many years ago, and (if you noticed) branded their petrol pumps "Esso Energy"

they are also just as huge in natural gas as in oil (which is to say: very big on the engineering aspects, crap on the trading)

AND their not getting into power** was probably right - at least the first time around (1990s), because most of the other oil majors had a crack at that time (BP, Shell, Total, Conoco, Statoil etc etc) and screwed up royally.

(we're great engineers, we all have big power plants at our refineries, what can go wrong? Big Mistake. Not all energy is the same)

As it happens, they are all sidling back into power right now, vowing to do things differently / better this time
**also, for decades the most profitable single asset in the Exxon portfolio was its large stake in China Light & Power, the biggest HK power co. Obviously, in 2013 they sold it ...

Old Git Carlisle said...

Shade of British gas / Gas Council/ Area Boards.

Could not work out what the job of many of my erstwhile colleagues was. The all appeared to live for meetings.

Mind you I did enjoy Grid Controllers !!!

Anonymous said...

@ that would blithely flout US sanctions if it chose*

Couldwe hear thatstory now please?!

Graeme said...

Just to keep attention on the unrolling disaster of some UK property portfolios: "Though Great Portland Estates (GPE) says its low leverage and liquidity leave it "well prepared for any eventuality", many areas of the central London property group’s portfolio remain challenged. Just over four-fifths of March and June's quarterly rent has now been collected, though rental deposits were required to boost September's rent collection figure to 73 per cent.

Just 21 per cent of retail, hospitality and leisure clients have paid this quarter’s rent, which partly explains why chief executive Toby Courtauld only singled out the firm’s belief in “the long-term appeal of well-designed and located offices”. The occupancy among GPE’s office portfolio currently stands at 27 per cent, suggesting tenants have been proved far more resilient."