Markets & Finance

Exxon Mobil's Gusher


Executives at the Irving, Tex., headquarters of ExxonMobil (XOM) probably didn't know whether to laugh or cry. On Apr. 27, the oil giant reported that first-quarter net income surged 14%, to $8.4 billion, as revenues increased 8%, to $89.0 billion. The profits were a record for the company and the fifth-highest ever reported by any public company.

Nevertheless, Exxon, under newly anointed Chief Executive Officer Rex W. Tillerson, managed to disappoint plenty of people. Wall Street was unhappy that the results didn't match analysts' consensus estimates, much less exceed the expected mark, as the company has done regularly in recent quarters. In addition, many consumers, already bemoaning the $400 million retirement package for former CEO Lee Raymond, saw the earnings as more proof that Exxon and other oil companies are gouging them at the pump.

Exxon offered some comforting words to both groups. In a conference call with analysts and investors, company executives pointed out that earnings were crimped by a $300 million one-time adjustment for taxes and litigation expenses, as well as a heavy schedule of maintenance.

CONSUMER CONCERN. In a separate call with the press, Exxon took a more consumer-friendly approach. Executives said they regret the pain that customers are feeling at the pump, but pointed out that consumers in most other parts of the world pay much more because of higher fuel taxes. They emphasized that management is doing everything it can to boost supply in the marketplace (capital spending was up 41% in the quarter, to $4.8 billion). And they argued that the best thing Washington could do is to stop talking about measures such as windfall profit taxes that would discourage production, and instead open up more of Alaska and offshore areas to drilling.

But while Exxon was doing its best to mollify financial pros and consumers, the folks it is really intent on pleasing are shareholders. The company "distributed" a massive $7 billion to shareholders in the first quarter -- $2 billion in dividends and $5 billion in share buybacks. That's up 67% from 2005's first quarter.

And there's more to come, with $6 billion in buybacks planned for the current quarter. "Within the last year alone, the share repurchase program has nearly doubled, which further demonstrates our ongoing commitment to return cash to shareholders," said Henry Hubble, the company's vice-president for investor relations, in the analyst conference call. Exxon's stock sunk $2 after the earnings announcement, but recovered rapidly, finishing the day at $62.66, down only 44 cents.

TOUGH BARGAINS. Even better for shareholders, and perhaps for consumers, Exxon is adapting rapidly to the increasingly competitive global energy markets. Governments in the more promising producing areas such as North Africa and Russia are driving tough bargains in an effort to raise their portion of production revenues.

Some, like Venezuela, are running roughshod over the majors. Exxon has walked away from some deals there rather than accept what it considers to be unfair and uneconomic terms. Production in traditional areas of the U.S., Canada, and Europe is falling. Yet Exxon, with big new projects on stream in Africa and the Far East that have been a decade in the making, was able to boost oil and gas production by 5% in the quarter.

Exxon is taking its usual approach of thinking long term and being disciplined in pursuing exploration and production opportunities. Still, it's demonstrating some flexibility, allowing the company to take full advantage of its scale and technical know-how to keep winning new business. In March it beat out five other supermajors to win a coveted agreement with Abu Dhabi National Oil for a 28% undivided interested Upper Zakum, one of the world's largest oil fields.

Exxon will help lead an effort to increase Upper Zakum production by about 50%, to 750,000 barrels per day, while also using its expertise to maximize the productive life of the field. As part of the deal, announced in late March, Exxon will provide support for the local workforce from its Houston training and high-tech hub and help establish a new research and development center at Petroleum Institute, the leading technical university in Abu Dhabi.

CLOSE TO THE VEST. Similarly, ExxonMobil just signed an agreement with P.T. Pertamina for the Cepu contract area in East and Central Java, Indonesia. This extends a 100-year involvement by Exxon affiliates in the area and allows it to move ahead with production work on a new discovery estimated to have the potential to produce 165,000 barrels per day.

Exxon is being even more guarded than usual in divulging the precise terms of some of these new deals. Analysts pushed for more information about the Upper Zakum arrangement, wondering if Exxon were being forced to sacrifice its customary revenue split. The company refused to divulge any new details.

Chances are good that Exxon didn't give away the store. The company has a track record of positioning itself to take a key role in the most important global areas over the long term. That kind of gamesmanship is exactly what the company needs to keep from disappointing investors in the future.


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