Market Slide Puts a Spotlight on Big Oil’s Cash Hoard

THE WALL STREET JOURNAL

OCTOBER 7, 2008

By RUSSELL GOLD

Rising fears of a global economic downturn are sinking crude oil prices and driving down the share prices of major oil companies despite the industry’s record profits of the last two years.

Exxon Mobil Corp., the largest U.S. company and largest Western oil company by market capitalization, has lost 17% of its share price since January, its worst showing since 1981. Its smaller peers are doing worse. The stock prices of Chevron Corp., BP PLC, Royal Dutch ShellPLC, Total SA and ConocoPhillips, the largest western oil companies, all hit new 52-week lows during the day on Monday.

The stock drops are driven by concerns that a world-wide recession will bring an end to the high oil prices that have been the primary driver behind these companies’ record earnings. The other main way Big Oil boosts its profit — oil and gas production — “has not been growing,” notes Credit Suisse analyst Mark Flannery.

Historically, oil demand rises and falls with the economy. A global recession would slow or reverse demand growth and deflate prices, pressuring oil companies to take one or more steps to boost their share prices. Analysts say these include acquiring another company to boost growth, increasing share repurchases, or offering a significant dividend increase.

Several of these companies, however, say they won’t change course. A spokesman for Irving, Texas-based Exxon says it is continuing on its long-term strategy of building value. “Shares do what the shares do,” he said. A spokesman for London-based BP said, “We don’t manage the company day-to-day based on what’s happening to the share price.” BP shares are down nearly 38% in the last 52 weeks.

The companies maintain brawny balance sheets, thanks to months of $100-plus oil prices, have ample cash and are seen as good credit risks. Moreover, their investments have been made based on much lower oil price assumptions. Unlike many smaller energy companies, they aren’t compelled to shed assets or cut their capital budgets to manage their cash. But sitting still isn’t a permanent solution. Current, low interest rates can mean poor returns on capital.

One large oil company that may need to change direction is ConocoPhillips. The Houston company needs to deliver $5 billion this month to Australia’s Origin Energy Ltd. under terms of a joint venture it entered into last month to produce natural gas for export.

Mr. Flannery argues that Big Oil will need to put cash into acquisitions to restore the battered share prices. So far this year, Exxon has lost $108 billion in market capitalization since peaking at $512.65 billion in January. Others analysts contend that Exxon and its peers can wait for a fire sale by troubled companies.

Compared with many blue chips, Exxon, Chevron and other oil majors are cash-rich. Exxon has $39 billion in cash and has been buying back shares at an $8 billion-a-quarter clip. The value of the stock it has repurchased is about $218 billion, a shade less than the current value of General Electric Co.

One possibility mentioned by investors would be for Exxon and Chevron to increase their buybacks to improve earnings per share. Energy analysts at Goldman Sachs and Merrill Lynch see longer-term oil market prices as remaining strong, allowing oil companies to buy their own shares while those prices are low. But this strategy is risky as oil companies have become political targets in the presidential campaign for not doing enough to boost supplies of oil and gas.

—Ben Casselman contributed to this article.Write to Russell Gold at [email protected]

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