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Exxon could slash 2020 capex by up to 20% this year as oil prices collapse

Exxon Mobil Corp., the U.S.'s largest publicly traded energy company, is feeling the squeeze of the dramatic oil price meltdown and could deliver what analysts have long hoped for a slash in spending.

With its back against the wall, Exxon could take drastic action to protect its balance sheet by potentially slashing spending this year by as much as 20%, according to analysts.

Though the integrated majors are better insulated from oil price down-cycles than independent producers, the expectation of sustained crude prices below $40 per barrel is inciting a rash of cost-cutting measures.

"It is not surprising that oil companies, even majors like Exxon, will pare back capital budgets in response to the recent meltdown in oil prices," Raymond James analyst Muhammed Ghulam said in a March 17 email. "They need to be able to conserve cash [so as] to minimize borrowing in order to fund operations and their dividends."

Soon after S&P Global Ratings sliced Exxon's issuer credit rating to AA from AA+ and lowered its unsecured debt ratings to AA from AA+, the Texas-based major said March 16 it was considering significantly cutting its capital expenditure plan in the near term.

Although Exxon has not offered an exact figure for the spending reduction, analysts say it could range from 10% to 20% of the company's previous capex spending guidance of $33 billion for 2020.

"The potential capex cut should come as no surprise, everyone needs to cut capital spending in here and everyone will, including the integrateds," Edward Jones analyst Jennifer Rowland said in a March 17 email. "I wouldn't expect to see drastic capex cuts from Exxon and peers, but 10-20% is probably a reasonable assumption."

Most analysts, including Ghulam and Tudor Pickering Holt & Co., expect Exxon will cut capex for the year at the lower end of the range, somewhere between 10% and 12%.

Across the sector, the unprecedented crash in global crude oil prices could lead to an average 10% cut in the announced capital expenditure plans of the top integrated oil and gas companies, Ghulam said.

"Even companies that do not explicitly announce spending cuts will no doubt spend less than they would have if oil prices had not posted their large declines," Ghulam said.

The global equities and commodities markets continue to be rattled daily by the unprecedented market conditions caused by the new coronavirus outbreak, and the massive downturn in commodity prices has thrown a monkey wrench into the budgeting plans for oil companies of all sizes.

Most independent producers already announced spending cuts of around 25% to 30% from prior estimates, with the goal of minimizing their exposure to freefalling oil prices. West Texas Intermediate crude oil futures settled the March 17 session below $27/bbl, closing at $26.95/bbl, losing 6.1% on the day and down 55.8% year-to-date. For the first time in more than four years, Brent crude oil futures settled below $30/bbl on March 17 at $28.73/bbl, declining 4.4% on the day and down 57.8% year-to-date.

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Merely two weeks ago at its annual investor day, Exxon said it was plowing ahead with its aggressive capital expenditure plan through the middle of the decade, still expecting to spend an average of $30 billion to $35 billion annually from 2021-2025. At the time, analysts expressed concerns that Exxon's lofty capex could cause the major to rack up additional debt and limit cash flow over the next five years after it spent more than $31 billion in 2019.

However, even before the oil price crash, analysts noted that Exxon, given its large capital spending program, had not been generating free cash flow. In 2019, Exxon's capital spending and dividends for the full year exceeded its operating cash flow by nearly $10 billion, and the company was using debt to fund its free cash flow shortfall. At the end of 2019, Exxon's debt was $46.9 billion.

Cash flow concerns, sluggish commodity prices and an increased push for oil majors to address climate change had been keeping generalist investors away from the underperforming oil and gas sector for some time. Exxon's stock price has been on the defensive for a while, first sinking to 10-year lows in February after disappointing fourth-quarter 2019 earnings prompted Wall Street behemoth Goldman Sachs to downgrade and lower its price target for the company, weakening investor confidence and igniting the initial sell-off in the major's stock.

After probing 22-year lows on March 16, Exxon's stock price on the NYSE increased 6.7% to close at $36.81 per share March 17, slightly outpacing a 6.0% gain for the S&P 500 index. Year to date through March 17, Exxon's share price is down about 48.1%.

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This S&P Global Market Intelligence news article contains information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.