A Shell game in oil (but at Chevron, not Shell…)

Imagine the sting of going to your boss and saying, “We need an $11 billion write-down on those investments I made…”

Which is what the CEO of Chevron, Mike Wirth, announced to shareholders (aka, his actual bosses) in December. A write-down typically reduces earnings on the Income Statement and asset-value on the Balance sheet, both of which sting. So much for several downgraded natural gas and oil projects.

But the story also provides a valuable lesson in business leadership and how to avoid a very deep sunk-cost trap. As Warren Buffet has said about financial discipline, “The most important thing to do if you find yourself in a hole is to stop digging.

Beyond the goal of protecting shareholders and putting capital returns above asset expansion, the story is also about oversupply and slowing demand for fossil fuels amid climate-change concerns. Call it “The Tesla Effect”.

And it’s not over yet – Chevron also has large cost-overruns on its Tenzig oil project, and other oil producers will probably have similar write-downs in 2020.