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Exxon’s Cash Hoard Fuels Biggest Stock-Price Drop in 27 Years



An attendant pumps gas at an Exxon Mobil station in Point Pleasant, New Jersey on June 1, 2008. Photographer: Jin Lee/Bloomberg News

An attendant pumps gas at an Exxon Mobil station in Point Pleasant, New Jersey on June 1, 2008. Photographer: Jin Lee/Bloomberg News


Exxon’s Cash Hoard Fuels Biggest Stock-Price Drop in 27 Years 
By Joe Carroll

Sept. 22 (Bloomberg) — Exxon Mobil Corp., the world’s most valuable company, has never been richer. Shareholders think its cash a sign of weakness. With petroleum output falling at the fastest pace in a decade and shares tumbling the most in 27 years, growth prospects are evaporating.

The world’s biggest oil company is piling up cash faster than it can be spent, thanks to crude prices above $100 a barrel. Exxon Mobil’s $39 billion in cash amounts to 15 percent of assets, almost six times the average of the company’s 10 biggest peers, according to data compiled by Bloomberg.

That hasn’t helped investors, as Exxon Mobil fell 15 percent in New York trading this year, heading for the worst drop since 1981. While Royal Dutch Shell Plc,BP Plc and ConocoPhillips boost spending to acquire reserves, Irving, Texas-based Exxon Mobil is shelling out more money to buy back stock than for drill bits, pipelines and related investments in its operations, said William Andrewsof C.S. McKee & Co.

“They don’t have much growth potential,” said Andrews, who holds Shell shares among the $7.8 billion he helps manage at C.S. McKee in Pittsburgh. “If you don’t have enough growth opportunities, then you’ve got to do something else with the money, but buybacks don’t necessarily add anything.”

Exxon Mobil, whose market value of $413 billion is larger than any other company, earned a record $40.6 billion last year. At the same time, the company’s capital spending as a percentage of sales was the lowest in the industry. Its stock is dropping despite $80 billion in buybacks since December 2005 and ended last week at $79.61.

Limited Options

Exxon Mobil can’t rely on big acquisitions or exploration for growth, saidWilliam Ferer, who manages $2.8 billion, including 573,000 Exxon Mobil shares, at W.H. Reaves & Co. in Jersey City, New Jersey.

Exxon Corp. purchased Mobil Corp. for $88 billion in 1999 after a decade-long slide in crude output. Today, U.S. and European regulators probably would halt attempts by Exxon Mobil to acquire a major rival such as ConocoPhillips because it would concentrate too much refining capacity in one company, Ferer said.

The company can’t drill its way to larger reserves and production either, because most of the world’s biggest prospects have been discovered or are placed off limits by governments such as Venezuela and Russia, said Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd.

Exxon Mobil spent the equivalent of 57 percent of the cash generated in the past four quarters on buybacks, three times the ratio of other major U.S. oilproducers, according to data compiled by Bloomberg.

Lagging Behind

Since Rex Tillerson, 56, became chief executive officer in 2006, Exxon Mobil has risen 42 percent, lagging behind the 52 percent gain by the CBOE Oil Index of 11 U.S. and European oil producers. New York-based Hess Corp., Chevron Corp. of San Ramon, California, Los Angeles-based Occidental Petroleum Corp. and Apache Corp. of Houston all rose more.

Tillerson declined through a spokesman to be interviewed.

Exxon Mobil didn’t replace 24 percent of the oil and gas it pumped in 2007. Proved reserves fell 1.6 percent, compared with an average growth rate of 1.2 percent a year over the previous five years.

“Now is a period of time when they don’t see opportunities to invest and make good returns on their dollars,” said Douglas Ober, who manages $1.1 billion at Petroleum & Resources Corp. in Baltimore. “They’re looking for big fields that are going to move the needle with respect to reserves.”

Tillerson’s Restraint

Exxon Mobil hasn’t followed Shell and ConocoPhillips in acquisitions or forming joint ventures to boost reserves. Michael Cuggino praised Tillerson for avoiding deals as long as asset prices are inflated by energy prices.

“While it makes sense to constantly replace reserves, it doesn’t make sense to do it at any price,” said Cuggino, who oversees $3.8 billion as president of Pacific Heights Asset Management LLC in San Francisco. “I don’t want to see them whittle away their cash reserve in the next 5 or 10 years.”

Tillerson showed restraint when other producers made deals that could become unprofitable as prices drop, Cuggino said. U.S. oil futures tumbled 29 percent from the record high reached in July and ended last week at $104.55 a barrel.

Exxon Mobil’s earnings per share excluding one-time costs and gains are estimated to rise 27 percent this year after oil and gas prices jumped in the first half.

Elephants Only

Exxon Mobil trades at 8.6 times its estimated per-share profit over the next year, 36 percent higher than the average price-earnings ratio of Shell, BP, Chevron, France’s Total SA and ConocoPhillips, according to data compiled by Bloomberg.

Exxon Mobil, a descendant of the Standard Oil Trust that John D. Rockefellerbuilt, has been stymied by its own standards, said Barry James, who manages $2 billion at James Investment Research in Xenia, Ohio.

Tillerson may be forced to change his strategy of only pursuing oil and gas fields of at least 1 billion barrels of reserves that he expects to generate returns on investment of at least 30 percent, James said.

The company ignored much of the Gulf of Mexico because of the lack of so-called elephant fields. Most discoveries in the Gulf have been too small to justify the expense of building platforms and pipelines to link them to onshore markets, Tillerson told investors and analysts in March.

$52 Million a Day

The company’s return on capital employed in oil wells, refineries and chemicalsplants was 34 percent in 2007, compared with 5.4 percent from cash holdings, public filings show.

Tillerson is spending $52 million a day this year to find and tap oil and gas deposits from the Philippines to Brazil to Madagascar. The company plans to start production at 19 new sites by the end of 2010 that will add the equivalent of 725,000 barrels of daily oil output, enough to supply 52 percent of the refining capacity along the U.S. East Coast.

Exxon Mobil started producing oil and gas during the first half from wells in Azerbaijan, Nigeria and Angola. Its proved reserves are larger than those of Shell and Chevron combined. If the company halted all exploration, reserves would sustain current production levels for 14 years.

Exxon Mobil’s cash exceeds the market capitalizations of Marathon Oil Corp., Hess and Husky Energy Inc., the Calgary- based oil producer controlled by Hong Kong billionaire Li Ka- shing. Buying Husky would increase reserves by 4 percent. Marathon would boost Exxon’s reserves by 5.6 percent.

Shares in Treasury

Exxon Mobil had $131 billion in shares in treasury as of June 30 that could also be used for acquisitions before the company would need to borrow or issue new stock. In the past decade, Exxon sold $11.2 billion of assets, mostly filling stations and gas fields, public filings show. It biggest deal was the $88 billion purchase of Mobil nine years ago.

Shell, Europe’s biggest oil company, plans about 6 percent more capital spending this year than Exxon Mobil. That’s in addition to the $12.8 billion The Hague-based company used the past 18 months on acquisitions to add reserves.

London-based BP, ConocoPhillips of Houston and Paris-based Total spent a combined $12.3 billion during the same period to buy oil and gas fields or form joint ventures that will boost reserves.

“Exxon hasn’t done any major acquisitions since Mobil because they believe they can internally generate projects that deliver superior returns,” said Ferer of W.H. Reaves. “The market is very unforgiving to companies that have not been able to replace reserves, even if the lack of growth has been for understandable reasons.”

Baby Elephants

Chevron, the second-biggest U.S. oil company, embraced the type of projects that Exxon Mobil shunned. In the past seven years, Chevron discovered the equivalent of 1.58 billion barrels of oil spread across six fields in the Gulf of Mexico.

The walls of one floor of Chevron’s Houston exploration office are lined with oil paintings of infant elephants to commemorate Gulf discoveries that don’t measure up to the definition of elephant fields.

The average size of Chevron’s Gulf finds is 263 million barrels of oil equivalent. Exxon Mobil may be forced to lower the bar, said Wells of Neftex. Even after the slide in oil prices since July, a 200 million-barrel prospect is more valuable than a 1 billion-barrel field was in December 1998, when Exxon agreed to buy Mobil, Wells said.

In the 1970s, discoveries outside the Organization of Petroleum Exporting Countries totaled about 20 billion barrels annually. Such finds have dropped to 7 billion to 8 billion barrels a year in the past half decade, he said.


“There’s still quite a bit of geography to go, but most of the good bits of the world left for oil exploration are pretty difficult environments in which to operate,” Wells said. “Exxon is awash in cash but opportunity-constrained.”

Exxon Mobil’s cash balance is 53 percent larger than the surplus that led Dearborn, Michigan-based Ford Motor Co., the second-biggest U.S. automaker, to give shareholders a $6 billion special dividend in 2000. Exxon Mobil holds 19 percent more than Redmond, Washington-based Microsoft Corp. did when the world’s largest software maker paid investors $32.6 billion in 2004.

Tillerson said in 2006 that he wouldn’t consider a special dividend and that any excess cash would serve as an insurance policy against a plunge in oil prices. The CEO’s position hasn’t changed, company spokesman Tony Cudmore said.

“Those special dividends did very little, if anything at all, for the stock, though I’m sure the shareholders who got cash were happy to get it,” Tillerson said in a March 2006 interview in New York. “I don’t think our shareholders are looking for a quick payout. They’re looking for steady growth. They’re going to see the value of that cash one day anyway.”

To contact the reporter on this story: Joe Carroll in Chicago at[email protected].

Last Updated: September 22, 2008 01:00 EDT

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