NEW YORK/HOUSTON, April 26 (Reuters) - Exxon Mobil’s effort to build an energy trading business to compete with those of European oil majors unraveled quickly last year as the firm slashed the unit’s funding amid broader spending cuts, 10 people familiar with the matter told Reuters.
The cuts left Exxon traders without the capital they needed to take full advantage of the volatile oil market, these people said. The coronavirus pandemic sent prices to historic lows - with U.S. oil trading below zero at one point - before a strong rebound. That created an immense profit opportunity for trading operations willing to take on the risk.
Exxon instead systematically avoided risk by pulling most of the capital needed for speculative trades, subjecting most trades to high-level management review, and limiting some traders to working only with longtime Exxon customers, according to interviews with 10 former employees and people familiar with Exxon’s trading operation. Traders were restricted to mostly routine deals intended as a hedge for Exxon’s more traditional crude and fuel sales rather than gambles seeking to maximize profit, four of the people said.
The trading retreat came after Exxon had worked in the previous three years to bolster its trading unit with revamped facilities, high-level hires and new tools to help traders take on more risk. The company’s cautious strategy in the pandemic sparked the exodus of some of those senior-level new recruits, along with Exxon veterans, as the company downsized the department amid broader spending cuts, according to the people familiar with its trading operation.
“They were careful with capital during a period of time when they maybe shouldn’t have,” one trader who left Exxon in the last year said of its management.
Exxon’s trading retreat came as the company overall posted a historic $22.4 billion net loss in 2020. Exxon does not separately report the performance of its trading unit. Reuters was not able to determine the trading department’s overall profit or loss, or the specific reduction it made in capital available for speculative trading.
Some of Exxon’s biggest rivals made enormous trading profits last year as their traders bought oil and stored it when prices plunged, then sold it at higher prices for future delivery. Rival Royal Dutch Shell said in March that it doubled its 2020 trading profits to $2.6 billion over the previous year. BP Plc’s trading arm earned about $4 billion, a near record, Reuters reported previously, based on an internal BP presentation. Such profits helped both companies offset massive losses from a collapse in fuel demand and prices as the pandemic curtailed travel worldwide.
Exxon declined to comment on whether it scaled back speculative trading or reduced the department’s capital and staffing. An Exxon spokesman said its trading team continues to have a “broad footprint.”
“We’re pleased with our progress over the past couple of years,” said spokesman Jeremy Eikenberry.
The cutback in Exxon's trading operation comes amid broader setbacks. The firm's stock, after hitting its lowest level in nearly two decades last year, was removed from the Dow Jones Industrial Average, an index of the top 30 U.S. companies. The firm's cash flow declined sharply tmsnrt.rs/3m1ZFMK, and its debt rating was cut two notches in 12 months.
Exxon said in October that the firm would eliminate 14,000 jobs, 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 bins, two sources said.
HIGH RISKS, REWARDS
Top oil trading firms make money by buying and selling oil to take advantage of price differences in different markets, a strategy known as arbitrage. They also speculate on futures contracts, betting on whether the oil price will rise or fall by specific dates. The big players include trading units at major oil producers such as BP, as well as specialized merchants such as Trafigura AG.
The risks are high, but successful trading desks can deliver returns of 20% to 25%, much higher than other parts of the oil-and-gas business, estimated Andy Brogan, a partner at advisory firm EY and leader of its oil-and-gas practice, in an October EY publication.
Exxon, the largest U.S. oil producer, has historically viewed trading skeptically and limited its activity. After Darren Woods became CEO in 2017, however, he broke with tradition and sought to build up the company’s small trading unit.
The company began hiring consultants, recruiting veteran traders and revamping its trading floors in Spring, Texas, and Leatherhead, England. Among the hires were well-regarded traders and marketers from firms including commodity trader Glencore Plc and U.S. refiners Andeavor and Phillips 66. Exxon equipped the expanded staff with risk management tools to help trading executives assess potential losses, laying the foundation for a bolder strategy, two people familiar with the operation said.
CEO Woods initially pledged last March that the firm would “lean into” the oil-market decline by continuing major investments across the company. He reversed course a month later, ordering broad spending cuts as oil fell below $30 a barrel.
Woods vowed to protect a $15-billion-a-year shareholder dividend as Exxon’s stock price tumbled. By contrast, Shell and BP reduced their dividends. Exxon’s decision contributed to deep spending cuts and heavy borrowing across the U.S. oil giant, which took on about $21 billion in debt last year. .
The quick retreat of Exxon’s revamped trading desk underscores the firm’s longstanding aversion to risk, said Anish Kapadia, director of energy at Palissy Advisors.
“The trading business is a risk business,” he said. “That has never been one of Exxon’s fortes.”
Exxon canceled an early 2020 trading strategy meeting at Exxon’s Irving, Texas, headquarters. After that, “everything went on hold,” said one 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-cutting continued throughout 2020, the trading operations in Texas and England began sending expatriate workers back to their home countries to save on allowances for housing, cars and tuition benefits, said two people familiar with the moves.
Exxon’s financial woes and restrictions on trading led to the exodus of many department staffers, including senior traders and managers, according to three former trading employees and others familiar with the operation. Exxon laid off some trading employees and offered others early retirements or severance packages, the people said, while more staffers left through attrition. Reuters could not determine the total number of departures.
Among the prominent departures were Exxon veteran Steve Scott, who led Exxon’s British crude oil trading operation in 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 at oil producer BHP Billiton orchestrated some of the first exports of U.S. crude in decades before joining Exxon in June 2018.
Scott and Knowles could not be reached for comment. Lee declined to comment.
Additional reporting by Julia Payne in London and Dmitry Zhdannikov in London; editing by Gary McWilliams, Simon Webb and Brian Thevenot