ExxonMobil will exit 2020 battered, bruised, but not beaten. 

In a year that has tested the industry's mettle, the US supermajor on Monday announced that it would write down the value of its natural gas assets by as much as $20 billion in the fourth quarter.

The Irving, Texas-based giant made the disclosure in a release announcing its updated business plan for the next five years. It is a plan that reads like many already unveiled by its peers: high-grade the asset base to generate cash and cut costs.

Responding to changed environment

The impairment is a first ever of this scale for ExxonMobil, according to energy consultancy Wood Mackenzie.

“ExxonMobil’s impairment follows the other supermajors in responding to the changed external environment brought on by the crises in 2020,” Tom Ellacott, senior vice president, corporate research at the UK-based group, told Upstream.

“The write-down had already been well sign-posted and continues an industry trend of large write-downs in the North American gas sector.”

ExxonMobil noted the possibility of a write-down in its third-quarter earnings call, with plans to remove and market the assets that had a carrying value of approximately $25 billion to $30 billion.

Rebasing of business

The assets are in the Appalachian basin and Rocky Mountains and across the US states of Arkansas, Oklahoma, Louisiana and Texas. Additionally, it said it removed assets in western Canada and Argentina.

“It allows for a rebasing of the business to concentrate investment on the most advantaged assets in its portfolio,” said Ellacott.

Those assets are its oily resources in the core shale patch of the US Permian basin, Brazil and Guyana.

ExxonMobil’s recent deep-water Tanager-1 wildcat on the Kaieteur block off Guyana was rated a non-commercial discovery of heavy oil, a rare disappointing result for the supermajor as it has racked up a plethora of successes on another block off the country, Stabroek.

“Recent exploration success and reductions in development costs of strategic investments have further enhanced the value of our industry-leading investment portfolio,” chief executive Darren Woods said this week.

“Continued emphasis on high-grading the asset base-through exploration, divestment and prioritisation of advantaged development opportunities-will improve earnings power and cash generation, and rebuild balance sheet capacity to manage future commodity price cycles while working to maintain a reliable dividend," he added.

Cleaning the house

ExxonMobil putting its dry gas assets up for sale comes at an interesting time in the marketplace. While low oil prices have slowed development activity across the US, natural gas appears to be gaining ground.

The Energy Information Administration (EIA) said it expects tightening balances to boost Henry Hub spot gas prices to a monthly average of $3.38 per million British thermal units in January.

In its short-term energy outlook, monthly average spot prices are forecast to remain higher than $3 per MMbtu throughout 2021, averaging $3.13 per MMbtu for the year from a forecast average of $2.07 per MMbtu in 2020.

Analysts at US-based investment bank Raymond James in an October note forecast that extensive production declines and rising demand should push Henry Hub natural gas prices higher, exiting 2021 at around $4 per MMbtu.

Producers back at the pumps

With prices the highest they have been in two years, more producers are ramping up their natural gas operations.

The number of rigs drilling for natural gas started out at 123 at the beginning of the year before dropping to a low of 68 in July, according to a rig count from US oilfield services giant Baker Hughes. In the four months since, it has been a gradual and mostly steady increase to 77 rigs at the end of November.

Oklahoma-independent Continental Resources recently shifted its drilling rigs to gas and Apache announced its plans to complete three drilled wells in its gassy Alpine High play in Texas next year.

EOG Resources, the largest shale oil producer in the US, announced in November that it plans in 2021 to start selling gas from new wells drilled in its newly discovered Dorado field in the Austin chalk and Eagle Ford shale formations of southern Texas. The field holds an estimated 21 trillion cubic feet of net resource potential contained in 700 feet of stacked pay.

The increased interest in natural gas, in turn creates a more advantageous environment to offload assets.

“There hasn’t been much of a market for gas assets the last few years, hampering one’s ability to sell them. We’re seeing more buyer interest around natural gas assets by both the publicly traded gas producers through acquisitions and some private equity money being deployed into the gas space,” said Andrew Dittmar, senior mergers and acquisitions analyst for Texas-based Enverus.

Cost cuts

While the full long-term impact on the oil and gas industry of Covid-19 will remain unknown for some time, the more immediate short-term impacts on the energy markets have led many producers to cut back on capital expenditure.

ExxonMobil in April cut about 30% — or $10 billion — from its capital spending budget, bringing the total for 2020 to $23 billion. Part of the plan released in April included steps to lower cash operating expense by 15%. 

ExxonMobil said on Monday that it is on track to exceed that goal as well as its 30% capital spending cut for this year, and the company plans to leverage those cost-saving measures going forward.

Business line reorganisations and global workforce reductions of 15% by the end of the year are credited as being a key part of the cost savings. 

Ellacott noted that “cutting costs, driving up margins and improving business resilience will be a priority to ensure long-term sustainability".

For 2021, ExxonMobil plans to spend between $16 billion to $19 billion on capital and exploration investments. In the years following 2021 through 2025, the company plans to spend between $20 billion to $25 billion a year between 2022 and 2025. 

Finance

ExxonMobil's $20 billion hit 'continues trend' of large oil and gas industry write-downs