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Financial Times: Partial Exxoneration

Published: March 9 2007 02:00 | Last updated: March 9 2007 02:00

“Y’all enjoy the cold weather in New York.” Rex Tillerson, chief executive of ExxonMobil, hails from sunny Texas. His quip rounded off one of the more important events in global oil’s calendar, namely Exxon’s latest strategy update, presented this week amid flurries of snow in Manhattan.

Chilly weather does wonders for energy demand. Along with fog in the Gulf of Mexico’s shipping lanes, it lay behind the surprise drop in US oil inventories reported on Wednesday. Light, sweet crude jumped by more than $1 a barrel in response. That, in turn, probably had more to do with the 1 per cent increase in Exxon’s share price that day than anything said in the meeting itself.

The issue is not weak operating performance. Exxon’s presentation contrasted with those from BP and Royal Dutch Shell a month ago. Exxon’s history of industry-beating growth and profitability featured prominently, as did the staggering fact that it has returned $92bn of cash to shareholders over the past five years. The company did tweak down its own production growth target, but partly because of a recent decision to cancel a big gas project owing to lacklustre potential returns on its investment.

For all that, it is legitimate for investors to ask where even a star performer such as Exxon goes from here. Like its peers, Exxon has had a fair tailwind behind it for much of the past decade. Selling oil and gas from old fields when prices are shooting up is a recipe for huge profits. Now cost inflation, resource nationalism and rising capital expenditure bills are intersecting with a still-high but range-bound oil price.

For the sector as a whole, returns on capital appear to be levelling off, if not falling. Moreover, a sustained $10 drop in oil prices would expose weaknesses across the industry.

With the balance of risk and reward tending towards the former, buying into the integrated oil sector now is an unappealing prospect. That said, for those investors addicted to oil but looking for a safe haven in the sector, Exxon’s record and continuing investment discipline are not to be sneezed at.

Copyright The Financial Times Limited 2007

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