Just four or five years ago the collapse of a major oil company was a concept for the realm of science fiction. Today such an occurrence is well within the realm of possibility because of the falling price of oil.
On November 23, 2015, Brent Crude (the standard variety of crude oil in the United States) was trading at $43.70 a barrel; on November 20, 2014, the same commodity was selling for $77.61 a barrel. On November 20, 2013, the price of Brent Crude was $108.27 a barrel. Oil has lost well over half of its value in just two years.
You Won’t Believe How Much Revenue ExxonMobil Has Lost
Not surprisingly, the price freefall has wreaked havoc upon the revenues of the major oil companies. The king of oil, ExxonMobil (NYSE: XOM), reported a TTM revenue of $435.52 billion on September 30, 2014, that fell to $296.35 billion on September 30, 2015. ExxonMobil lost $139.17 billion in revenue in just one year.
To make matters worse, ExxonMobil has lost around two fifths of its revenue in just three years. In September 2012, ExxonMobil reported a TTM revenue of $488.17 billion. That means it has lost nearly $200 billion in revenue—$191.82 billion—in three years. Ouch!
“The market can remain irrational longer than you can remain solvent.” –John Maynard Keynes.
Obviously, no company, not even ExxonMobil, can stay in business if it keeps losing revenue at that rate. Sooner or later revenue losses will start cutting into operations, and it’ll go spinning into the death spiral.
The question we need to ask here is, do companies like ExxonMobil have the cash and resources to survive this revenue collapse? To do that, we need to ignore the punditry and politics and take a look at the financial numbers; unfortunately, the story told there is pretty discouraging.
Is Big Oil Still Making Money?
Despite its incredible revenue losses, ExxonMobil is still a good company that makes a lot of money, although there appear to be no silver linings hidden inside its dark clouds.
Some of the juicy numbers ExxonMobil reported for Third Quarter 2015 include the following:
- A net income of $19.94 billion
- A profit margin of 6.30%
- A free cash flow of $2.773
- Cash and short-term investments of $4.296 billion
- $33.38 billion in cash from operations.
Negative Income Could Be Two Years Away at ExxonMobil
ExxonMobil’s numbers make it appear as if Big Oil still has a license to print money. The problem is that it is not printing as much money as before. In September 2014 ExxonMobil reported $47.91 billion in cash from operations and a net income of $34.30 billion.
If its cash from operations and net income keep falling at the rate they’ve been falling, ExxonMobil could be experiencing negative income within two years. The numbers show us that ExxonMobil’s net income fell by $14.46 billion between September 2014 and September 2015. If the fall continues at the same rate, ExxonMobil would have around $5 billion in net income in September 2016 and around -$9 billion in net income by September 2017.
This could create real problems because ExxonMobil only had $4.296 billion in cash and short-term investments on September 30, 2015. It simply lacks the resources to cover the losses that might be coming its way within two years. This seems to refute the popular delusion that big oil has the resources to weather these revenue losses. The numbers indicate that Exxon, at least, does not.
Some smaller oil companies are already facing that situation. Occidental Petroleum (NYSE: OXY) reported a net income of -$6.064 billion on September 30, 2015. Just a year earlier, on September 30, 2014, Occidental reported a net income of $5.672 billion. Occidental’s revenue has fallen by $11.736 billion in just one year!
Nor is it just Occidental; Anadarko Petroleum (NYSE: APC) reported a net income of -$5.84 billion on September 30, 2014. That was down from -$2.13 billion in September 2014.
ExxonMobil Is No Longer a Widows and Orphans Stock
Investors should learn two things form these numbers:
- All the investments that big oil has been making in exploration and development of new oil fields are not paying off.
- There is no way that ExxonMobil will be able to keep paying out dividend yields of 3.55% and shareholders a return on equity of 11.46% if this continues.
Big Oil’s Business Model Is No Longer Working
This means that Big Oil’s current business model of exploration and research and development is no longer working. These companies are no longer a secure investment as Chevron (NYSE: CVX) indicates. Chevron reported a TTM revenue of $222.04 billion in September 2014 that fell to $155.32 billion on September 30, 2015. That’s a loss of around $66.72 billion in revenue.
Chevron also saw its net income fall from $20.7 billion in September 2014 to $8.646 billion in September 2015. That is a drop of $12.054 billion in a year. Chevron’s cash from operations also fell from $35.43 billion in September 2014 to $21.4 billion in September 2015, or a drop of $14.03 billion. To make matters worse, Chevron reported a negative cash flow of -$1.45 billion, which indicates that its revenues cannot cover its current operating expenses.
Why Buffett Dumped ExxonMobil
Like ExxonMobil, Chevron could be just two years away from negative revenue. It also means that within two years, Chevron shareholders will have to kiss their 4.74% dividend yield and 5.57% return on equity goodbye. It is easy to see why Warren Buffett has been dumping his ExxonMobil shares. Uncle Warren thinks this stock has lost its value.
That means ExxonMobil and Chevron will no longer be widows and orphans stocks or value investments. It also means that there is going to be major economic havoc wreaked because many long-term investors, retirees, pension funds and the mutual funds that many middle-class Americans rely upon for retirement income are heavily invested in Big Oil.
Smart people should follow Uncle Warren’s lead right now and dump Big Oil. Those that want to make money from oil should follow Buffett’s lead and invest in refiners like Phillips 66 (NYSE: PSX). With oil prices super cheap, there’s going to be lots of business for refineries as oil consumption booms.
If low prices continue for a few more years, this industry is going down the death spiral, and some big names could collapse and disappear. My prediction is that it is only a matter of time before a major oil company collapses if present trends continue.