The Incredibly Shrinking Exxon-Mobil

Big oil is withering away before our eyes, and destroying a classic value investment in the process. No oil company seems to be shrinking faster than Exxon-Mobil (NYSE: XOM).

The largest U.S. oil company has almost half of its revenues disappear in the last three years. Back in September 2013, Exxon reported $442.09 billion in revenues and $224.88 billion in revenues in September 2016. That makes for a $217.21 billion drop in revenues over a period of just three years.

What’s even scarier for investors is that XOM’s revenue is falling by several billion dollars or more each quarter. It lost $8.67 billion in revenues during third quarter 2016 which better than second quarter when it lost $16.42 billion in three months.

Those numbers alone indicate that Exxon-Mobil’s business is no longer sustainable. No company, not even one with $224.88 billion in revenues can survive while revenues are dropping by $8 billion to $16 billion a quarter.

Exxon-Mobil Shrinks some More

Nor is it just revenues that are disappearing at Exxon Mobil. The company’s net income fell by $25.24 billion over the past three years.

Exxon Mobil reported a net income of $34.18 billion in September 2013 and $8.94 billion for third quarter 2016. That’s right nearly three fourths of Exxon’s net income evaporated in just three years.

Quarterly income losses have slowed but they’re still pretty ugly, XOM reported a net income of $10.53 billion in June 2016 and $8.94 billion in September. That’s a loss of $1.59 billion, which is better than second quarter when XOM lost $2.49 billion, but still horrific for investors.

If these losses continue at the present pace, Exxon-Mobil will be reporting a negative income, a loss by first quarter 2018. That’s a little over a year away, which should worry investors relying on XOM’s dividend for income.

Exxon’s Cash is Slowly Disappearing

Nor is it just income that’s vanishing at Exxon, the cash is slowly but steadily disappearing; Exxon-Mobil’s cash from operations dropped by $28.86 billion over the past three years.

XOM reported $47.93 billion in cash from operations in September 2013 and $19.07 billion in cash from operations in September 2016. That means more than half of Exxon-Mobil’s cash has disappeared over the past three years.

The only cash number at Exxon Mobil that has improved recently is free cash flow which was $1.951 billion on September 30. That’s certainly better than the -$1.176 billion reported in December 2015, but it’s still $1.013 billion less than the $2.773 billion from September 2015.

That number shows us that Exxon has far less float than it did less than one year ago. This should scare dividend investors to death, because it indicates Exxon will not have the money to pay the dividend in a few years; perhaps as soon as 2018 or 2019.

Financial Numbers Show how Fast Exxon is shrinking

The financial numbers demonstrate that Exxon’s entire business is shrinking, and shrinking fast.

The company’s assets have shrunk from $352.76 billion in September 2014, to $340.66 billion in September 2015, to $339.39 billion now. That is not so bad, but we must remember assets are not cash.

The kind of assets that Exxon-Mobil owns can be especially problematic because a large percentage of them consist of oil and gas in the ground. It costs money to extract those resources, so the company will have to take a loss for years before it starts recovering its investment.

Another problem is that Exxon-Mobil seems to be diverting resources from exploration and development to the bank. It reported $5.093 billion in cash and short-term investments on September 30, 2016; up from $4.296 billion in September 2015, and $4.962 billion in September 2014.

That number indicates a little float, but to me it seems low for a company with assets of $339.39 billion and revenues of $224.88 billion. One has to wonder if Exxon is burning through cash simply to keep its day-to-day operations running.

There’s also an enterprise value of $402.72 billion for November 11, 2016, which is an improvement from $378.79 billion for November 10, 2015. We must remember here that an enterprise value is a theoretical number, an estimate of the company’s worth and nothing more. All it means is that Exxon might make a lot of money by selling off its assets, if it can find a buyer.

That might be more difficult than we think in today’s environment, given Exxon-Mobil’s $356.78billion market capitalization for November 16, 2016. That was certainly an improvement over the $342.82 billion it reported on November 10, 2015 but it is still a sharp decline from the $400.84 billion market capitalization, Exxon-Mobil enjoyed on November 13, 2014.

Can Exxon-Mobil Turnaround?

The numbers prove that Exxon-Mobil is shrinking but it is still making a lot of money. The dilemma for investors is there seems to be no end to that shrinkage in sight.

It is possible that Exxon-Mobil might survive and make a lot of money, as a smaller, leaner and meaner company but that process will take time. The company will have to trim a lot of fat, and sell a lot of assets to achieve that goal. One possibility might be withdrawing from international operations; or exploration and development, entirely and becoming a purely North American operation.

Another opportunity might be to merge and grow bigger an acquisition; particularly of an ailing European oil company; like BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.B) or even Total (OTCF: TTFNF), is a strong possibility right now. Although such a merger might not be able to clear regulatory hurdles in today’s political environment.

A future recovery is uncertain because to return to the revenues Exxon-Mobil enjoyed a few years ago we would need to see oil triple or quadruple in price and stay at that price for three or four years. Given today’s oil glut that’s a highly unlikely scenario.

Exxon-Mobil’s Bleak Future

Long-term prospects for Exxon-Mobil are even bleaker with the rejection of fossil fuels and advances in electric car and lithium battery technology. A grave danger to Exxon’s future is the possibility that electric cars might become cheaper than gasoline or diesel burners in a few years.

This is not pie in the sky, Bloomberg reported that lithium-ion battery costs have fallen by 65% since 2010 and by 35% in 2015. If that trend continues the cost of a lithium battery powered vehicle will be comparable to a gasoline car by 2022. Since electricity is far cheaper than gasoline, and performance for electrics is better than gas or diesel cars, Exxon-Mobil might see much of its market simply vanish even with President Trump crusading to save fossil fuels.

My suggestion is to sell Exxon-Mobil right now because its future is going to be a very bumpy ride. The uncertainties it faces outweigh the income it generates. Investors might enjoy a nice dividend for a few years, but even that may soon disappear.