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Bloomberg: Slow, Steady Liquidation of the World Oil Industry: David Pauly

By David Pauly

Oct. 1 (Bloomberg) — If Chevron Corp. keeps buying back its stock at the current rate, the company will have liquidated all its shares by about 2023.

Chevron, the second-largest U.S. oil company after Exxon Mobil Corp., last week announced a plan to repurchase as much as $15 billion of its stock over three years. At today’s prices, the buyback would retire about 7.5 percent of Chevron’s outstanding shares. You can do the arithmetic from there.

Buybacks are the rage in the cash-laden oil industry. Exxon Mobil is buying back about $30 billion of its shares each year. If that continues, Exxon will have repurchased all its stock by about 2024.

This isn’t as absurd as it seems. Oil companies aren’t merely catering to a Wall Street enthralled with buybacks. While such repurchases increase the amount of earnings and assets behind the remaining shares in a company, the party for shareholders would end if assets and profits begin to fall.

And investor-owned oil companies — along with government- owned producers outside the Organization of Petroleum Exporting Countries — are only a few years away from going into decline.

By 2011 or so, these companies, including Royal Dutch Shell Plc and BP Plc in the U.K., France’s Total SA and ConocoPhillips in the U.S., will no longer be able to increase their production, says Charles Maxwell, an analyst at Weeden & Co. in Greenwich, Connecticut.

By 2014, their output will begin a long decline, says Maxwell, who has been involved in the industry for 50 years, mostly as an analyst. “They’ll be in liquidation,” he says.

Backsliding

The industry isn’t finding new crude-oil reserves fast enough to keep up with world demand for gasoline and other fuels made from crude.

Right or wrong, oil executives hold back on exploration, insisting that the risk of finding and producing more — even with crude prices of $80 a barrel and more — is too great. Weeden’s Maxwell says the rule of thumb in the industry today is that $45 a barrel is about the breakeven point.

While Exxon Mobil will spend $21 billion this year on exploration and plant improvements, that’s considerably less than it will spend on buying back its shares.

This bodes ill for consuming nations that will become even more dependent on OPEC, many of whose members are politically inimical to them.

Daily production outside of OPEC already has peaked in Mexico, Russia and the North Sea fields owned by the U.K. and Norway, analyst Maxwell says, and China’s output will peak in about 2010.

No Help

A decline in production to zero for these companies would take decades, of course. While OPEC could help consuming countries by increasing its production enough to take up the slack, so far it hasn’t. “The non-OPEC world can’t increase production and the OPEC world won’t,” Maxwell says.

If oil proves to be a finite commodity, as many analysts say, OPEC eventually will run out, too. The production of one member, Indonesia, already has peaked and Libya’s will in about five years, Maxwell says.

In most cases, stock buybacks are suspect. Managements should ignore investors’ call to repurchase their shares and invest money in ways that will increase profit, not just earnings per share. Still, if the oil industry is going to liquidate in this century, buybacks might be a reasonable way to begin.

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey, at [email protected]

Last Updated: October 1, 2007 00:14 EDT

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