Introduction
In today’s column I take on board more frontally the added reputational and business risks, which flow from the circumstance that ExxonMobil [Guyana’s lead oil Contractor] displays the characteristics of a zombie corporation as that term is commonly understood in the formularization of the dynamics of zombie firms in business and economics. The zombification of ExxonMobil is indeed a vital analytical foundation underpinning this extended series of columns on Guyana’s emergence as a Petrostate. Given this diagnosis I lay out in the next section, a summary description of the key metrics that distinguish a zombie business.
Zombie Corporation Metrics
There is a voluminous body of literature on zombie firms and stocks. I would strongly urge readers to google the topic. To be helpful I’ll refer to useful readings, going forward.
Simply put a zombie company is one unable to service its debt from current profits, over an extended period of time. Investopedia offers a fuller definition. That is, zombie companies are those:
“which earn just enough money to continue operating, and are in debt but unable to pay off their debt. Such companies given that they just scrape by meeting their overheads [wages, rent, interest payments on debt, for example] have no excess capital to invest to spur growth. Zombie companies are typically subject to higher borrowing costs and may be just one event – market disruption or a poor quarter performance – away from an insolvency or a bailout. Zombies are especially dependent on banks for financing, which is fundamentally their life support”.
In addition, Investopedia notes that zombie companies are also known as the “living dead or zombie stocks”.
In the literature, the term zombie company has been widely attributed to having been coined by Caballero et al in their article published in 2008, in the American Economic Review, AER, Vol 98 entitled “Zombie Lending and Debt Restructuring in Japan.” This article seeks to explain what is widely termed in economic development circles as Japan’s lost decade. That is the extended depression which the country endured during the 1980s. Subsequently, following the huge economic and financial setbacks caused by the Great Recession, which commenced in 2007/8, concerns over zombie companies shifted to other industrial economies. A classic study of this phenomenon is R Banargee and B Hofman “The Rise of Zombie Firms: Causes and Consequences,” Bank of International Settlements, BIS, Quarterly Review September 2018
These empirical studies found some defining characteristics in the performance of zombie companies, and a few are cited here. One is that zombie firms are likely to have lower productivity than their otherwise counterparts. Indeed, a tendency to crowd out firms with higher productivity levels has been also observed in empirical studies [see OECD, Walking Dead? Zombie Firms Productivity and Performance in OECD Countries]. Second, zombie firms have been found to have lower investment levels than their peers in the sector. Further, zombie firms also offer less employment opportunities than their competitors. And finally, Zombie firms arise from episodic events like financial shocks both national and international in scope. Two major consequences flow from this latter consideration. One is, there could be a ratchet or compounding effect. Second, the broader market environment plays an independent role in the rise of zombie businesses.
Is Zombie Status Terminal?
There is a widely held view that once a company [business, firm or stock] arrives at zombie status there is no way out; it remains stuck as the living dead or actually becomes insolvent and of no commercial use. This is a serious mis-characterization. Zombie firms are not in a terminal limbo or phase of existence. Bailouts from Governments and reorganization are options for emerging from zombie status. My analysis of ExxonMobil will demonstrate that firm started in Q3 2021 to show signs of turnaround from its zombie designation in the previous decade
Assessment
The thesis I had earlier advanced in Q1 2022 was that, Guyana’s emergent oil and gas sector has already contributed mightily [to say the very least] to the improved outlook of ExxonMobil. Further, the thesis has been elaborated in four stages.
Stage 1 specifically relies on ExxonMobil’s announcements and guidance, based on its declared proven reserves These are routinely provided at its Investors Presentation; laying out its longer-term plans for 10 Floating Platforms for Storage and Offloading, These FPSOs plan to produce around a million barrels of crude oil per day. Stage 2 evaluates these assets against Guyana’s proven geologic petroleum resources. Stage 3 assesses the income opportunity for Guyana and Exxon Mobil separately. And, finally, Stage 4 assesses overall risks.
Based on the above, the Value Portfolio arrives at the following assessment:
”Every so often companies arrive at “company maker” discoveries, products, etc. Guyana has the potential to be a “company maker” for ExxonMobil especially with current prices >$80 / barrel Brent. The Guyana basin reasonably has the potential to earn tens of billions. Margins at current Brent prices are a massive $55 / barrel showing the portfolio’s strength”
Acknowledging the risks as highlighted above. I share this assessment of ExxonMobil’s likely turnaround away from growing indebtedness and zombification as these relate to contributions by Guyana’s emergent oil and gas sector to this outcome.
Conclusion
I had intended in this column to deal at some length with widely reported deformations of ExxonMobil, apart from its heavy indebtedness and zombie status as defined in business, finance and economics. Space does not allow me this opportunity. The preponderance of ExxonMobil reputational risks does not bode well for Guyana.
