Exxon Mobil XOM.N CEO Darren Woods’ first five years at the oil company were marred by missed oil production targets, an investor rebellion and the company’s biggest-ever financial loss. Redemption came this year when – aided by a share price pumped up by high oil prices – he clinched a $60 billion deal to buy shale rival Pioneer Natural Resources PXD.N to guarantee a steady stream of crude from the United States’ most prized shale field.
His plan aims to balance profits from cheaper barrels of oil closer to home, like Guyana’s vast offshore oilfields, with a risky multi-billion-dollar promise to create and sell decarbonizing services at margins akin to oil.
“We can address the emissions without throwing out all the investments that have been made (in oil),” the CEO told Reuters at the climate summit COP28 on Saturday. “Whatever the demand is, we’re competitive. That’s the strategy.”
Woods has set for himself a short four years to deliver on his latest strategy, according to Reuters interviews with Exxon executives, former employees, investors and partners.
The executive plans to lay out to investors a new era for Exxon on Wednesday, when he updates the company’s capital spending plans and production curve to incorporate his recent goals.
He is expected to offer Wall Street an updated budget for addressing methane leaks, and the impact of a waning future for motor fuels and the rise of hydrogen fuels and battery-powered electric vehicles, costly issues with no simple solutions.
“You grow and you grow, and you grow, and then you sell it to Exxon,” said oil analyst Paul Sankey, from Sankey Research.
Analysts say Woods is implicitly asking the market for the benefit of the doubt on the acquisition of Pioneer and Denbury, a $4.9 billion carbon-pipeline firm Exxon bought to underpin its plans to sell carbon sequestration services to other companies.
“The path that they’re going down is the path that we thought they should go down,” said Chris James, chairman of activist investor Engine No. 1 which led a victorious 2021 proxy fight that attacked Exxon for overspending in oil.
Woods deal for Denbury fits into an overall $17 billion bet on decarbonization and hydrogen through 2027. To allay investor worries about declining demand for gasoline and other fuels, he has restructured its downstream units to easily switch to chemical from motor fuels.
At the same time, the company plans to have a leading role in the vehicle electrification business. In November, Exxon pledged to become by 2027 a large scale producer of lithium, the raw material used in electric vehicle batteries.
MORE OIL VS GREEN AMBITION
Exxon’s ambitious agenda includes starting up the world’s largest hydrogen power plant by 2027. These low-carbon businesses can generate return on investment of between 10% and 20%, Exxon said.
“We expect this business to generate solid double-digit returns and we expect to compete for capital inside of the rest of the ExxonMobil portfolio,” said Low Carbon Solutions unit President Dan Ammann.
Capital spending on low carbon technologies will take about 11% of the company’s annualized budget through 2027, or roughly half of what European peers invest. But that is a dramatic difference from as recently as 2.5 years ago, when less than 1% of Exxon’s budget was devoted to projects with low emissions.
“We can evaluate whether this is a business or not in 2027,” said Goldman Sachs analyst Neil Mehta.
To prove Woods is right, Exxon would need to generate between $1.7 billion and $3.4 billion in net income from the business by 2027, he said. Woods and Ammann declined to specify a targeted year for delivering the promised profits.
RISKY BUSINESS
The investment plan contains risks. Both hydrogen and carbon capture are yet to be regulated, infrastructure is sparse or nonexistent and profitability is uncertain. Returns will also depend on hefty government subsidies.
Spending in low carbon currently is constrained by scarcity of customers willing to sign up for contracts and insufficient regulations, Woods said.
Exxon has convinced the largest ammonia maker in the U.S., an industrial gas company and a large steel company to ink long-term contracts for carbon reduction services. The services should be fully paid for only after plants, pipelines and carbon reservoirs are in place.
(Reporting by Sabrina Valle in Houston; additional reporting by Richard Valdmanis in Dubai. Editing by Gary McWilliams and Anna Driver)
