Oil cor****ations do what oil cor****ations are supposed to
do, which is the same thing all cor****ations are supposed to
do: maximize profits. Last year Exxon earned $40 billion,
but it paid $32 billion to buy back stock. Buying back stock
makes the price go up immediately. Exxon currently has about
$238 billion dollars worth of stock in its treasury. Oil
companies are not in the business of investing in oil
production, so much as they're in the business of
maximizing shareholder value. For both private oil companies
and state-owned oil companies sometimes there's more money
in simply leaving the oil in the ground.
"The Saudis have indeed deliberately decided to leave theirs
in the ground. "King Abdullah, the country's ruler, put it
more bluntly: "I keep no secret from you that, when there
were some new finds, I told them, 'No, leave it in the
ground, with grace from God, our children need it'.'' FT
5/19/08. I see the interest rate as part of the Saudis'
decision how much oil to pump. Because the current rate of
return on financial assets is abnormally low, they can do
better by saving the oil for the future than by selling it
today and investing the proceeds. Holding back production
raises today's oil price, to a point where the expected
future return on oil has fallen to the same level as the
interest rate"
http://seekingalpha.com/article/80407-exxon-s-hoard
"BusinessWeek
MAY 28, 2007
NEWS & INSIGHTS
Pumping Cash, Not Oil
Exxon's risk-averse stock-buyback strategy is the new profit
model
With gas prices hitting record highs, Exxon Mobil (XOM )
Corp. ought to be drilling like mad and refining more of
that black gold, right? As it turns out, the world's largest
oil producer thinks it is smarter to use more of its
resources to buy back stock. The indirect result: increased
pain at the pump for consumers.
It's Big Oil's new formula for making money. Last year,
Exxon pumped out $49 billion in operating cash flow on sales
of $365 billion. It's the world's most profitable company,
but Exxon is plowing a smaller percentage of its spare cash
back into the business. Although capital expenditures have
risen from $11 billion at the start of the decade to nearly
$20 billion, that spending amounts to roughly 40% of cash
flow, down from 50% in 2000. Meanwhile, overall production
has barely budged since its megamerger in 1999.
Instead, Exxon is bingeing on buybacks to help boost
profits, which also benefit from higher commodity prices.
Repurchases have been part of Exxon's strategy for decades,
but they've exploded in recent years. Exxon spent 60%, or
$29 billion, of its cash flow on repurchases in 2006, more
than any other company in the Standard & Poor's 500-stock
index and a tenfold increase since 2000. The company has
retired 16% of shares in the past five years, adding an
estimated 88 cents to earnings of $6.68 per share. With
Exxon's stock handily beating the market and peers with a
15% annual return over the past decade, others in the oil
patch are catching on to the strategy. "They don't need to
grow production in order to generate shareholder returns,"
says energy consultant Richard Gordon.
Exxon takes pride in its fiscal restraint. At a
three-hour-long meeting with Wall Street analysts in March,
top brass used the word "discipline" no fewer than 29 times.
In Exxon parlance, that refers to a sharp focus on returns.
It means not chasing marginally profitable oil wells, not
pouring money into costly new refineries, and not staffing
up aggressively. Exxon employs 82,000 people, 10,000 fewer
than in 2002. "Our business model," Chairman and CEO Rex W.
Tillerson told analysts, "begins with discipline."
GETTING BURNED
That mantra traces back to the early 1980s. Like many oil
producers, Exxon tried to diversify during the 1970s boom,
pouring billions into unsuccessful forays such as an attempt
to produce oil from shale deposits in Colorado and the
acquisition of Reliance Electric, an electric motor
manufacturer. "We had huge cash flow and not many good
investments to put it into," then-CEO Clifford C. Garvin Jr.
said at the time, according to The Prize, Daniel H. Yergin's
Pulitzer-winning book about the industry.
If anything, it's even more challenging for Exxon to find
op****tunities today. For one, there are issues with access
to oil fields. In April, Venezuela President Hugo Chávez
nationalized a number of large oil fields in that country,
including Exxon's. Exxon also must compete for hot prospects
with government-sponsored oil companies that don't have to
worry about pleasing Wall Street. Plus, the really juicy
fields are located thousands of feet underwater off the
coast of Africa or in remote parts of the former Soviet
Union, locales that require years of spadework to start
producing. "An investment of any consequence takes a minimum
of six years," says Kenneth P. Cohen, Exxon's vice-president
for public affairs.
But sometimes it's im****tant to take a little risk. Despite
the failed ventures during the 1970s, that boom period also
produced world-class fields in the North Sea and Alaska's
Prudhoe Bay that appeared speculative at the time but are
now critical sources of supply. Exxon seems to be shying
away from such risks today. Citing higher-than-anticipated
costs, it backed out of a project in February that would
have converted natural gas in Qatar into diesel fuel for
ex****t. Similarly, Alaskan politicians have been begging oil
companies to build a new pipeline to carry natural gas to
the 48 continental states. Exxon says it would pursue the
project only if the tax situation in the state is favorable.
CEO Tillerson has also indicated publicly that he won't
build a new refinery in the U.S., pointing to internal
research that domestic gasoline consumption will plateau in
coming years as ethanol and energy-efficiency measures crimp
demand. Indeed, there's plenty of legislation in Congress
right now aimed at curbing consumers' appetite for gasoline.
So Exxon is partnering with two companies, one Chinese and
one Saudi Arabian, to build a $3.5 billion refinery in
China, where demand seems more assured.
Currently, Exxon pumps out 4.4 million barrels of oil and
natural gas a day, roughly the same as its output seven
years ago. The company's production of gasoline, jet fuel,
and other refined products is 5.7 million barrels a day,
modestly higher than 2000. Exxon says it has added 130,000
barrels of capacity but also divested plants to improve
profitability.
Exxon isn't the only big company facing essentially flat
output. Oil and gas volumes slid 1% last year at Royal Dutch
Shell (RDS ) PLC. After adjusting for recent acquisitions,
they were flat at BP (BP ), Chevron (CX ), and
ConocoPhillips (COP ). "Companies say, 'There are fewer
places we can find big oil,' and there's some truth to
that," says Amy Myers Jaffe, who heads the Baker Institute
Energy Forum at Rice University in Houston. "Wall Street has
to ask itself whether it made sense to create these big oil
companies when some smaller, nimbler players are doing
better [at finding op****tunities]."
Although Exxon has said it will increase oil and gas
production from 4.4 million barrels to just under 5 million
barrels by 2010, it has a poor record, like other oil
majors, of generating such growth. It's also unclear whether
it really makes sense from a profit standpoint. After all,
Exxon has proved that buybacks enhance earnings nicely. And
management doesn't seem to be easing up. In the first
quarter, Exxon repurchased $7.8 billion worth of stock.
'RELIEF VALVE'
Exxon is not alone. Chevron, which also says it plans to
increase production, bought back some $4.5 billion of its
stock in 2006, vs. $2.6 billion the prior year. Overall, the
industry spent $52.4 billion on buybacks last year, nearly
double the amount in 2005. "Exxon has established the path
most companies are following," says Arthur L. Smith,
chairman of industry researcher John S. Herold Inc. "The
profound fear is that prices are going to fall again, and
the relief valve is stock buyback."
But as gas soars past $3.10, politicians and others are
increasingly scrutinizing the way Big Oil does business. On
May 9 a handful of lawmakers held court at an Exxon station
near the Capitol to offer their prescription for lower
prices. Senator Maria Cantwell (D-Wash.) is promoting an
"anti-gouging" bill aimed at oil companies. Senator Bernie
Sanders (I-Vt.) wants a windfall tax on outsize profits such
as Exxon's and hopes to break up the massive oil companies
formed through mergers, which he says have curbed
competition.
Still, even Sanders concedes that his proposals are a long
shot. "Economists tell us high prices should send the signal
for Exxon to invest [in growing production]," says Tyson
Slo***, director of the energy program at the consumer group
Public Citizen. "But that's not happening. They're
transferring that money from the wallets of consumers to
shareholders."
By Christopher Palmeri, with Eamon Javers in Wa****ngton,
D.C.
http://www.businessweek.com/magazine/content/07_22/b4036057.htm
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