THE WALL STREET JOURNAL: Exxon’s $10.89 Billion Net Disappoints Investors, Fuels Gathering Political Storm

Exxon Mobil Corp.’s $10.89 billion first-quarter profit report Thursday ranks as one of the biggest hauls in U.S. corporate history. But the results disappointed Wall Street and added to concerns about the future of the industry.

Exxon, the world’s biggest non-government controlled oil company by market capitalization, notched a 17.3% increase in profit over the year-earlier period largely from the surge in oil prices, which set new records earlier this year. Yet the earnings discouraged investors, who at one point sent Exxon shares down as much as 5.1% in intraday composite trading on the New York Stock Exchange, the stock’s largest one-day drop since January. At 4 p.m., its shares finished at $89.70, down $3.37, or 3.6%.

Associated Press

Rex W. Tillerson

Among the biggest concerns: A number of factors conspired to affect production, pushing down the number of barrels pumped by 9.9% from a year earlier.

Exxon Mobil‘s head of investor relations, Henry Hubble, conceded the quarter was a rare “miss” for the energy giant, with earnings falling about $600 million short of analysts’ predictions. It was all the more disappointing to investors because surprisingly strong earnings reports byBP PLC and Royal Dutch Shell PLC earlier this week had raised hopes Exxon also would exceed expectations.

The soaring profits from fossil-fuels are coming as the rules for the industry are being rewritten, pressuring oil companies to move beyond fossil fuels to new sources of energy. With new finds rare and the best sources in countries that limit Western investors, crude oil is no longer viewed as the abundant, dominant fuel it once was. Critics contend that unless these companies focus more on the future, today’s record profits could dry up.

Exxon also faces a gathering storm on Capitol Hill as gasoline prices climb towards $4 a gallon, creating what some see as an inevitable increase in taxes on oil company profits. Democratic presidential contender Hillary Clinton Thursday called for a windfall profits tax on oil companies to be used to pay for a gasoline tax holiday. She also wants to create a $50 billion fund to invest in wind, solar and other clean energy sources.

MarketWatch’s Steve Gelsi says despite Exxon Mobil’s huge profits, the energy giant still faces the challenge of maintaining its pace of extracting fossil fuel.

On the Republican side of the aisle, some legislators are talking about tax changes to push oil companies to invest more in fossil-fuel alternatives. Rep. Devin Nunes (R, Calif.), a member of the tax-setting Ways & Means Committee, said in an interview Thursday that the U.S. should open up new areas for drilling, including offshore and the Arctic National Wildlife Refuge and then “take all the tax revenue from drilling there and put it into renewable [fuels] and advanced energy technology.”

Exxon Vice President Ken Cohen cautioned against making rash changes amid a charged political season. “It would be good for all of us to take a deep breath and recognize the long-term environment we operate in,” he said.

The industry is undergoing fundamental shifts that are difficult for even seasoned executives to parse. Energy demand isn’t reacting to high prices the way economists expected. Instead of moderating or falling, demand is still growing strong in most places around the world. Energy-producing nations are behaving in unexpected ways too, holding back additional production rather than opening up the spigots in order to maximize the cash flow to their treasuries.

Concern about global warming is driving the most sweeping environmental rule changes in a generation, making long-term investment more difficult until the final rules become clear. Even geopolitics is different than five years ago, as fast-growing China, India, Russia and Brazil have emerged as powerful forces on the global energy scene after scarcely registering a couple years ago.

The conclusion for many in the industry: the old fuel order is under assault.

“It is a very challenging time and even more challenging because the last few years looked so good,” said Frank Verrastro, director of the energy program at the Center for Strategic & International Studies, a Washington D.C. think tank.

Exxon’s Mr. Cohen says change is the status quo for the company. “I don’t want to use the term ‘business as usual,’ but the fact is, our business is always challenging,” he said.

Still, Exxon Chairman and Chief Executive Rex Tillerson is facing pressure from shareholders, politicians, and environmental activists with different, and often contradictory, priorities. The Irving, Texas, company is widely admired for its ability to deliver complex projects on time and on budget. Its focus has helped it deliver industry-leading profits through both peaks and valleys in the crude-oil commodity cycle.

The key issue it faces is how to spend the cash flow today’s $110 a barrel oil prices are generating. Earlier this week, descendants of Standard Oil founder John D. Rockefeller suggested Mr. Tillerson lacked the vision to lead Exxon by himself.

“Unfortunately, the big oil companies have had a very shortsighted view focused entirely on near-term profit opportunities,” said Alan Nogee, head of the Clean Energy Program at the Union of Concerned Scientists, which has been critical of the industry’s environmental practices.

Change doesn’t come easily to Exxon, which has a corporate culture deeply steeped in fiscal conservatism. Earlier this year, Exxon increased its capital expenditures by 25%, but that was largely to keep pace with cost inflation. It is plowing much of its cash into buying up its own stock, increasing its share repurchase program by $1 billion a quarter. It is now on pace to spend $24 billion this year on its own shares.

On Wednesday, Exxon said it would raise its quarterly dividend by a nickel to 40 cents, but J. P. Morgan analyst Michael LaMotte wasn’t impressed. “Though this is the largest [year-over-year] increase in almost 30 years, we are disappointed that the board did not do more,” he said in a report.

Members of the Rockefeller family are supporting shareholder proposals to create an independent chairman who can craft a more farsighted strategy. The proposals urge Exxon to look closely at investing in alternative fuels.

Exxon and other oil companies have resisted plunging into alternatives. The overwhelming majority of Exxon’s $25 billion-plus capital spending is focused on producing crude oil, natural gas, chemicals and gasoline. Exxon officials say they are investing in research that will usher in the next generation of renewable fuels because they don’t believe the current generation is viable.

Write to Russell Gold at [email protected]

 

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