Exxon Mobil’s efforts to create an energy trading company to compete with those of European oil majors quickly collapsed last year as the company slashed funding for the unit amid broader spending cuts, 10 people familiar with the matter told Reuters.
These cuts left Exxon traders without the capital they needed to take full advantage of the volatile oil market, the people said. The coronavirus pandemic propelled prices to historically low levels – with US oil trading below zero at one point – before a strong rebound. This has created a huge opportunity for profit for the risk-averse business operations.
Rather, Exxon has consistently avoided risk by raising most of the capital needed for speculative trades, subjecting most trades to high-level management review, and restricting some traders to working only with long-standing clients of Exxon, according to interviews with 10 former employees and people familiar with Exxon. commercial operation. Traders were limited to mostly routine trades meant to hedge Exxon’s more traditional crude and fuel sales rather than betting to maximize profit, four people said.
The trade retreat came after Exxon had worked over the previous three years to strengthen its trading unit with refurbished facilities, high-level hires and new tools to help traders take more risk. The company’s cautious strategy in the pandemic sparked the exodus of some of these top new hires, as well as Exxon veterans, as the company downsized amid broader spending cuts, according to reports. people familiar with its business operations.
âThey’ve been careful with capital for a time when they maybe shouldn’t have been,â said a trader who left Exxon last year of his management.
Exxon’s trading downturn came as the company as a whole recorded a historic net loss of $ 22.4 billion in 2020. Exxon does not separately report the performance of its trading unit. Reuters was unable to determine the trading department’s overall profit or loss, nor the specific reduction in capital available for speculative trading.
Some of Exxon’s biggest rivals made huge trading profits last year as their traders bought oil and stored it when prices fell, then sold it at higher prices for a future delivery. Rival Royal Dutch Shell (RDSa.L) said in March it had doubled its 2020 trading profits to $ 2.6 billion from the previous year. BP Plc’s business arm (BP.L) earned about $ 4 billion, a near-record, Reuters previously reported, based on an internal BP submission. The profits helped the two companies offset massive losses due to collapsing fuel demand and prices as the pandemic curtailed global travel.
Exxon declined to say whether it had cut back speculative trading or cut the department’s capital and staff. An Exxon spokesperson said its sales team continues to have a “large footprint.”
âWe are pleased with our progress over the past two years,â said spokesperson Jeremy Eikenberry.
The reduction in Exxon’s trading comes amid wider setbacks. The company’s stock, after hitting its lowest level in nearly two decades last year, was pulled from the Dow Jones Industrial Average, an index of America’s top 30 companies. Company treasury strongly decreased, and its debt rating was reduced by two notches in 12 months.
Exxon said in October that the company would cut 14,000 jobs, or about 15% of its global workforce, by the end of 2021. Among the belt tightening measures: asking U.S. office workers to empty their own trash cans, according to two sources.
HIGH RISKS, REWARDS
The major oil trading companies make money by buying and selling oil to take advantage of price differences in different markets, a strategy known as arbitrage. They also speculate in futures contracts, betting on the rise or fall of the price of oil on specific dates. Large players include trading units at large oil producers such as BP, as well as specialist traders such as Trafigura AG. (TRAFGF.UL)
The risks are high, but successful trading desks can generate returns of 20% to 25%, much higher than other parts of the oil and gas business, said Andy Brogan, partner of the consulting firm EY and leader in its oil and gas industry. -practical gas, in an October EY post.
Exxon, America’s largest oil producer, has historically viewed trading with skepticism and limited its activity. However, after Darren Woods became CEO in 2017, he broke with tradition and sought to create the company’s small business unit.
The company began hiring consultants, recruiting seasoned traders, and reorganizing its trading rooms in Spring, Texas, and Leatherhead, England. Among the hires were reputable traders and marketers from companies such as commodity trader Glencore Plc (GLEN.L) and US refiners Andeavor and Phillips 66. Exxon has equipped expanded staff with risk management tools to help business executives assess potential losses, laying the groundwork for a bolder strategy, said two people familiar with the transaction.
CEO Woods originally pledged last March that the company would “look into” the declining oil market by continuing to make major investments across the company. He reversed the trend a month later, ordering large spending cuts as oil fell below $ 30 a barrel.
Woods vowed to protect a shareholder dividend of $ 15 billion a year as Exxon’s stock price fell. In contrast, Shell and BP cut their dividends. Exxon’s move has contributed to major spending cuts and heavy borrowing from the U.S. oil giant, which took on roughly $ 21 billion in debt last year. .
The swift pullout of Exxon’s revamped trading desk underscores the company’s long-standing aversion to risk, said Anish Kapadia, chief energy officer at Palissy Advisors.
âTrading is a risky business,â he said. “This has never been one of Exxon’s strengths.”
Exxon canceled a business strategy meeting in early 2020 at Exxon’s headquarters in Irving, TX. After that, “everything was put on hold,” said a person close to the company. The oil market collapse in April triggered a working capital freeze in the trading group, a former Exxon trader told Reuters.
As cost reductions continued throughout 2020, business operations in Texas and England began sending expatriate workers back to their home countries to save on housing, car and living allowances. education, said two people familiar with the moves.
Exxon’s financial woes and trade restrictions have led to the exodus of many employees from the department, including traders and senior executives, according to three former sales employees and others familiar with the operation. Exxon laid off some commercial workers and offered others early retirement or severance pay, people said, while more employees left through attrition. Reuters could not determine the total number of departures.
Among the most prominent departures were Exxon veteran Steve Scott, who ran Exxon’s UK crude oil trading operation at Leatherhead, people familiar with the matter said. They also included Ben Knowles, who was behind Exxon’s exports to Europe and Asia; and Nelson Lee, who, while working at oil producer BHP Billiton, orchestrated some of America’s first crude exports in decades before joining Exxon in June 2018.
Scott and Knowles could not be reached for comment. Lee declined to comment.
Our standards: Thomson Reuters Trust Principles.