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ExxonMobil: The Cautious King Of The Oil Patch


Don't expect record oil prices and predictions of permanently tight supplies to change the course of Exxon Mobil Corp. (XOM) The largest publicly traded oil giant hasn't produced industry-leading returns in booms and busts by zigzagging with every price change. "Focus and discipline are even more important in these buoyant industry conditions," Chief Executive Lee R. Raymond told analysts on Mar. 9.

For some companies, boom times can be as damaging as busts if they make poor short-term decisions. But Exxon excels through all phases of the commodity cycle. Surging oil and natural gas prices and robust refining margins factored into last year's record $25.3 billion in net income and a leading 24% return on capital employed. But the company's stringent investment criteria, cost controls, and $600 million spent on research and development played a big role, vaulting Exxon to No. 7 on the BusinessWeek 50, from No. 23 in 2004. "Their business model is not predicated on any specific oil price," says analyst Fadel Gheit of Oppenheimer & Co. "They will still be the head of the class, no matter how difficult the exam."

Tough Negotiator

True to form, Exxon's staggering cash flow hasn't led to a gusher of new projects. The company generated more than $43 billion last year from operations and asset sales. But it returned some $15 billion to shareholders in the form of dividends and share buybacks -- as much as it invested in capital spending. Raymond insisted that the company is not "opportunity constrained," a view held by some analysts. But, he said, "only those projects we are confident will grow shareholder value make the grade." Every investment decision at Exxon greater than $50 million goes before the management committee. Raymond declined to be interviewed.

Still, at Exxon's size, with $271 billion in revenues last year, only megaprojects such as its $7 billion gas-to-liquids foray in Qatar are big enough to affect the company's bottom line. And the company is famous for being a tough negotiator in such places as Russia and Venezuela, where it insists that projects reap healthy profits no matter where oil prices head. Smaller oil companies, meanwhile, are increasingly willing to spend more and to sacrifice returns to win drilling opportunities. "There's not a country in the world that we just have to have a presence in," President Rex W. Tillerson told analysts.

Exxon is cautious partly because its leaders aren't convinced high oil prices are here to stay. Raymond recalls the devastating oil price collapse of 1985, when prices fell to $10 a barrel following predictions that they would hit $100. "It's hard to identify any single commodity that has ever maintained a very high price over a very long period of time," he told analysts.

The company can afford to be patient. With a diverse resource base equivalent to 73 billion barrels of oil and exploration rights in more than 30 countries, "Exxon is already sitting on top of a very large pool of potential development," says analyst Robert A. Kessler of investment bank Simmons & Co. Exxon's proven reserves, 22.2 billion bbl., could sustain 14 years of production at current rates. Excluding acquisitions, Exxon by 2011 will be one of the few majors to exceed its volumes today, predicts Kessler.

Analysts do expect one major change at Exxon later this year: the retirement of Raymond and the likely ascension of Tillerson, 52, to the top post. The company won't talk about its succession plans. But in true Exxon style, few expect a leadership switch to make a difference. "Exxon is a machine. It has been operating well for over 100 years," says Kessler. The job of Raymond's successor? Simply keep this machine humming.

By Wendy Zellner in Dallas


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