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THE WALL STREET JOURNAL: Exxon's Pile of Cash Keeps Growing, Adding Fuel to the Ire Over Oil Prices

Exxon's Pile of Cash Keeps Growing,
Adding Fuel to the Ire Over Oil Prices

By DAVID REILLY
May 9, 2006; Page C1

Move over, Microsoft Corp. Here comes a new cash king.

Thanks to soaring oil prices and record earnings, global energy titan Exxon Mobil Corp. appears to be on track to amass a cash mountain even taller than Microsoft's. That would give Exxon, the world's biggest company by stock-market value, bragging rights to one of the largest cash piles at a nonfinancial company.

Exxon's bank still isn't as big as Berkshire Hathaway Inc.'s. Neither is Microsoft's. But Berkshire boss Warren Buffett doesn't pay out dividends or repurchase stock. Had Exxon followed the same policy in the past three boom years, its cash pile would be about double that of Berkshire. Instead, Exxon these days pays out more than $2 billion a month to shareholders.

[Who's Got Cash]

Despite such an outlay, Exxon's total cash hit $31.9 billion at the end of March, compared with $28.6 billion at the end of 2005, according to figures filed late last week with the Securities and Exchange Commission. That puts Exxon within reach of Microsoft's cash and short-term investments of $34.8 billion at the end of March. Exxon's cash doesn't include $4.6 billion it has set aside related to the appeal of a court case. Berkshire had cash and equivalents of nearly $43 billion at the end of March, giving it the largest cash holding for a nonfinancial company, according to research provider Capital IQ. Banks, insurers and other financial firms, by definition, are huge cash compilers. (A number of Berkshire-owned companies are financial firms, but Berkshire also owns consumer-goods makers and other types of companies.)

Although good news for Exxon shareholders, the cash could hand the company's critics more ammunition. As gas prices have soared at the pump, Exxon and other big oil companies have come under attack from consumers and politicians who question whether oil companies have invested enough to increase production. Even some investors complain the cash buildup means Exxon isn't seeking out new energy projects.

Exxon counters that it takes “a long-term approach to managing the business both in terms of investment decisions and cash management,” a spokesman said in a written response to questions, adding that delivering additional supply “is not just a function of the cash that you spend, but it is also a function of careful project selection and execution.”

The Irving, Texas, company is spending money on more than just shareholder payouts. Exxon's capital expenditures in the first quarter rose 41% to $4.8 billion from year-earlier results, and the company plans to spend $100 billion by the end of the decade to develop additional oil and gas resources.

Investors are generally pleased with Exxon's capital-spending plans and increased payouts to shareholders, through dividends and buybacks, in the past two years, said Jennifer Rowland, oil analyst at J.P. Morgan Chase & Co. Exxon has shown itself to be “extremely disciplined,” she added.

Exxon's cash pile won't grow as fast if the price of crude were to tumble: Each $1 change in the price of oil causes a $500 million fluctuation in Exxon's cash-flow generation, said Fadel Gheit, oil analyst at Oppenheimer & Co. That tie to an underlying commodity is in contrast to companies such as Microsoft and Berkshire, whose fortunes are reliant on more typical business cycles.

However much cash it amasses, Exxon still has to manage it to Wall Street's expectations, despite any grousing by the public and politicians. “They have a fiduciary responsibility, they have shareholders and they have pension funds that would go after their throat if they squander the cash,” said Mr. Gheit, who pointed out that the search for new oil is being hindered by a backlog of construction projects.

Mr. Gheit dismissed the political clamor surrounding the oil companies. “We have not heard of any criticism of Microsoft when they had $50 billion in cash, and Exxon doesn't have a dominant position as Microsoft has in its industry,” he said.

So far, Exxon's record profits, rather than the company's huge cash pile, have garnered the most attention from critics. Yet Exxon's cash growth has sometimes outpaced earnings growth. In the first quarter, Exxon posted net income of $8.4 billion, up 6.9% from a year earlier. The company generated cash from operations of $14.6 billion in the first quarter, up 13%. That increase came because the company better managed its inventory and collections from customers, among other factors.

Although a $3 billion cash gap remains between Exxon and Microsoft, Exxon is producing cash at a faster pace; its cash holdings could eclipse Microsoft's within a couple of months. In the first quarter, Exxon's total cash rose by $3.3 billion, while Microsoft saw total cash increase just $261 million. A spokeswoman for Microsoft declined to comment.

Microsoft's cash was vastly diminished when the company in late 2004 paid out a record $32 billion special dividend, but Exxon's outlays for dividends and share buybacks are comparable. Including the one-time dividend, Microsoft returned a total of slightly more than $60 billion to shareholders between March 31, 2003, and March 31, 2006, according to SEC filings. During that same period, Exxon paid out about $55 billion to its shareholders, according to calculations based on SEC filings. And Exxon is still buying back stock.

Write to David Reilly at [email protected]

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