A Barrel of Cash

By Amy Feldman

For ExxonMobil, success has bred an odd problem. With oil prices hovering near $50 per bbl. recently, the energy behemoth has been churning out profits. Over the past 12 months (through the end of March), earnings gushed to $28 billion--almost 40% above the previous year--on revenues of $306 billion. With minimal debt, the oil giant, based in Irving, Texas, is sitting on a $30 billion hoard of cash. The problem: What will the company do with all that loot?

It is a question that oil watchers, policymakers and, of course, ExxonMobil shareholders are buzzing about. Will the company loosen its purse strings and go on a buying spree? Will it return all that cash to shareholders? Or will the company continue to salt away the dollars for a rainy day--and if so, for what specific purpose?

A company ExxonMobil's size routinely spends huge gobs of money. This year alone the company is expected to deploy some $16 billion on capital projects. Among other things, ExxonMobil is pushing heavily into the expanding market for liquid natural gas with a $7 billion gas-to-liquids foray in Qatar. But the company's projected capital spending is only $1 billion higher than last year, and even ceo Lee Raymond knows that some shareholders are frustrated that the company isn't being more aggressive about making investments. "When inevitably you ask me how we manage our cash, I will remind you that we take a long-term perspective," Raymond said to analysts recently. "First, we will not do anything stupid or silly. Secondly, don't expect us to take mechanistic or knee-jerk reactions."

Raymond is no dummy. The oil industry is the classic boom-and-bust business, and managing the booms can be as tough as getting through the busts. In previous periods of high oil prices, there has been an ugly history of overspending on poorly conceived projects that quickly soured. ExxonMobil seems determined not to fall into that trap. The company has produced industry-leading returns in recent years by not zigzagging with every change in oil prices. (It's worth noting that ExxonMobil's earnings are less tied to high prices than are those of other major oil companies.) To keep tabs on its spending, the company requires that all projects of $50 million or more--a small figure for a company of ExxonMobil's heft--must go before a five-member management committee for approval. "They've decided that throwing money at stuff doesn't make sense, unlike oil companies in the past that got high prices and went crazy," says Susan Byrne, chairman of Dallas-based Westwood Management, an investment firm that owns ExxonMobil shares. "They are not going to go on a spending spree."

Other shareholders think they should spend more. ExxonMobil's older oil fields in North America are in natural decline, yet the company has not cranked up spending on newer fields abroad--while competitors like ChevronTexaco and ConocoPhillips have begun to do so. "I would love to see them make more investments, especially in some of the areas that have recently reopened, like Libya," says Ted Parrish, co-manager of the Henssler Equity fund, which counts ExxonMobil as its No. 1 holding. Other investors put it more bluntly: "Over time you may have to question whether they are being too disciplined," says John Linehan, manager of T. Rowe Price Value fund, which owns ExxonMobil shares. "If you told people that we would be in an environment of $50 oil, and capital spending would be as constrained as it is, I think you'd have a lot of people scratching their heads."

The flip side: if the company can't find investment opportunities for all that cash, then why not hand it over to shareholders? ExxonMobil already gives its investors a hefty payout: last year it returned some $15 billion in the form of dividends and share buybacks. The company recently increased its dividend 7% and announced that it would accelerate its share buybacks by $1 billion a quarter, to $3.5 billion. At that rate, ExxonMobil could repurchase some $14 billion in stock by year-end. That's no small number, yet the company has the capacity to share even more.

Questions about what ExxonMobil might do with its cash are unlikely to die down anytime soon. After all, the company's growth is slowing--Wall Street projects its five-year growth rate at 8%, vs. the industry's 14%--and its share price, after a dramatic run-up last year that pushed the company's market value past that of General Electric, is now off its peak by 16%, at a recent $54. Yet the cash hoard just keeps growing, rising $7 billion in the first quarter alone. "A lot of investors might think that share buybacks and dividends and paying down debt are the way to go," says Robb Parlanti, a senior portfolio manager at Turner Investment Partners (which owns other energy stocks but not Exxon). "But the bigger question is, What are they going to do to grow the company long term?" That's a question that even the most disciplined companies eventually have to answer.