Pumping Cash, Not Oil

[Javaman]

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."

http://www.businessweek.com/magazine/content/07_22/b4036057.htm?chan=top+news_top+news+index_businessweek+exclusives

[poopfuel]

1. wait, wait, it's all biofuels fault! NY Times article

Those evil biofuels are scaring off investors so we have to keep prices high to pay for refineries! Not stock!

http://www.nytimes.com/2007/05/24/business/24refinery.html?hp

[phantom power]

2. Heh...

"It means not chasing marginally profitable oil wells, not pouring money into costly new refineries, and not staffing up aggressively."

Come on Rex, your "business model" is a final cash-out before the rest of the world internalizes the reality of peak fossil.

[hunter]

3. Someone in this oil market could bolt and make a lot of money undercutting their competitors...

... at least I suppose they could if they had the oil.

There's a little dance they are doing here that is entirely consistent with peak oil scenarios. If nobody can undercut you in price, and you've got oil in the ground, it's value increases every day so long as the demand is there. A refinery "breakdown" can increase the value of the oil you have left, so long as the demand does not go away. You make more money by not selling your oil than you do by selling it.

The economists at Exxon probably know exactly what their oil reserves are and exactly how much control they have of the market, so now all they have to do is twiddle with their outputs just enough to get a clear signal back which allows them to maximize their profits.

This has something to do with Iraq too, and I don't believe it's a simple thing like we are "taking their oil." The chaos we are causing there may have another purpose, and for all we know someone has explained this purpose to the Democrats who went along with the "no timetable" funding of the war.

I think the war in Iraq is cloud cover, bought at the expense of hundreds of thousands of lives, to obscure some awful truth, probably as a way of buying time because our leaders can't figure out how the hell they are going to keep this ship afloat.

I'm a pessimist, I don't think they can. We are about to experience the ugly and messy death of our national religion -- consumerism. Our economic idols are failing us, and no amount of sacrifice will appease them because from the very beginning this religion was based on the false pretense that humans were somehow exempt from the normal biological mechanisms that set limits on the growth and population of any species.

We didn't see the wall until we crashed into it, and now people are injured and dying all over the world because of that.