Exxon's Hoard

by: Felix Salmon June 06, 2008 | about stocks: DBO / OIL / XOM    
Felix Salmon

Felix Salmon

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I missed this, last week:

Exxon Mobil has amassed a large pile of common stock held in treasury. At the end of 2007, the company had 2.367 billion shares held in treasury, for which it paid $113 billion over the last 10 years, according to a regulatory filing. If that stock were valued at the current market price of $90 a share, it would be worth $237 billion, or $124 billion more than what Exxon Mobil originally paid for it.

In fact, if you look at the most recent 10-Q rather than the older 10-K, the numbers are even bigger: Exxon now has 2.736 billion shares held in treasury, for which it paid $123 billion. (The NYT report has a typo: the number at the end of last year was 2.637 billion shares, not 2.367 billion shares.) But the value of the shares that Exxon owns in itself is still about $238 billion, since the shares have now softened slightly to just over $87 apiece.

This is a good reminder that Exxon is not in the business of investing in oil production, so much as it's in the business of maximizing shareholder value. That $123 billion it's spent on its own stock could have been invested instead in the oil business - but Exxon refuses to invest any money unless it gets a return on capital employed of more than 35%. Any excess cash gets returned to shareholders in one way or another, either through dividends or through stock buybacks.

State-owned oil companies are also prone to underinvestment these days, using the much easier tactic of simply leaving 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.

All of which leads me to conclude that if high oil prices act like a natural carbon tax, in terms of bringing down demand, then financial incentives act a bit like a natural carbon cap, in terms of bringing down the amount of investment and production in the oil industry as a whole. It's just that at the moment, the financial benefits of these decisions go entirely to oil-producing nations and to the shareholders of big oil companies. If we implemented a carbon tax or a cap-and-trade system, everybody could get some of the upside.

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This article has 16 comments:

  •  
    Jun 06 09:53 AM
    One difference is that for the state owned companies, their oil will always be their oil. For independents like Exxon Mobil, they need to get the oil out or they will lose their lease and someone else will. In that sense the states and the independents are opposites. The problem the independents are having is access, exemplified by the Saudis' decision to keep their oil in the ground. As for the carbon tax, it's not clear to me how a tax somehow provides all of us with an upside. It looks to me that it provides all of us with a tax. It will be an upside to the politicians and the ones on whom they bestow their political favors.
    Reply | Link to Comment
  •  
    Jun 06 10:18 AM
    Any think the Saudis and others are holding out... and betting on oil futures at the same time to really make a bundle?
    Reply | Link to Comment
  •  
    Jun 06 10:28 AM
    From my experience in industry, executive bonuses are based mostly, at least partially, on the price of the stock at the end of their fiscal year. ExxonMobil's meager dividend compared to their extensive profits does not favor shareholders. If the XOM bonus plan is typical, the buy-back program favors the executives more than shareholders, at least those looking for current returns.
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  •  
    Jun 06 10:33 AM
    The statement that XOM will not invest unless the rate of return on capital is 35% is incorrect. XOM's internal hurdle rate on capital projects is no more than 15%. The 35% return on capital is the current rate of return on previous capital investments which may have been made many years ago.
    Reply | Link to Comment
  •  
    Jun 06 10:42 AM
    Saudi Arabia is the sly dog in the pack.
    They just won't tell anyone that they know by producing at rates above 9.5 million barrels per day extreme damage to their reservoirs is resulting. They don't talk about the water encroachment they have already seen.
    So they have many other "excuses" they defer to in order to not talk about their fields demise.
    Only a world wide recession will stop the upward price of oil. It is inevitable, because there are no alternatives (yet).

    Everyone wants to blame someone for the high prices. It is time to face the reality and get on with finding alternatives that will work.
    (unlike ethanol).

    Supply and demand is a law that politicians can not change.
    Reply | Link to Comment
  •  
    Jun 06 12:36 PM
    The terrorist dictator quoted above proves peak oil is garbage.
    Reply | Link to Comment
  •  
    Jun 07 08:12 AM
    Of course the Saudis say there is plenty of oil - they never want to see the US get off oil and would love to see the country go down the tubes.

    If oil is so very plentiful, why then is Saudi building the most expensive industrial project in the history of the world to pump sea water into the ground and to get the hardest crude to process - heavy crude? If oil is so readily available, why are companies in Canada scooping up tar sands with huge trucks and then spending gobs of money to process it? Debunking peak oil, when oil was up $10 in 2 days and is now pushing $140/barrel is missing the point: worldwide oil supply simply is not keeping up with worldwide oil demand. The futures markets sets the price, and those guys can see a year or two out. So can I.
    Reply | Link to Comment
  •  
    Jun 07 09:48 AM
    Or you could invest in the oil... wait it out... collect.
    Reply | Link to Comment
  •  
    Jun 07 10:57 AM
    Felix,

    No offense, but you still don't get it.

    The only reason Exxon's buying back their stock is there's NOWHERE for them to drill. Russian, Brazilian and North Sea oil and gas belong to their respective countries, see? And 85% of OUR offshore domestic reserves and ANWR are off limits to exploration, courtesy of the U.S. Congress.

    Moreover, the last thing in the world we need is a carbon tax or cap and trade. What do you think the Wahington politicians would do with $5 TRILLION new dollars? Why, they'd spend it, of course, on everything BUT energy technology. Just look at Social Security, Medicare and the post office if you don't believe me.

    Of course, you're right about one thing. Skyrocketing energy prices are causing drastic changes in consumer behavior. They're going BROKE, along with the auto, airline and trucking industries (...for a start!). Indeed, millions of Americans are losing their jobs or don't have the money to buy gas to get to work.

    Great job, Greens. I can't wait to see what else you and your fellow travelers in Congress have in store for us next. As your new leader likes to say, "Change we can believe in...!"



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  •  
    Jun 07 11:12 AM
    For RCW: Actually, large companies have a multi-tier compensation system for senior executives: 1. Base annual salary; 2. Annual bonus; 3. Long Term Incentives; 4. Stock options. Items two and three are generally based on meeting personal and company operational goals. For long term investors, as well as executive stock options, stock bybacks are generally preferable to dividends because taxes on stock appreciation are deferred until sale, and then at capital gains rates. For the company, they can also have larger by-backs in good years and less in bad years, while dividends become locked in. I would also expect Exxon's hurdle rate to be something around 15%.
    As an aside, Exxon's income taxes last year were equal to the total of the lower half of all US individual taxpayers - 65 million of them.
    RightinSanFrancisco.co...
    Reply | Link to Comment
  •  
    Jun 07 11:52 AM
    Congress needs to pull its head out! That's asking a lot out of those pompous morons! We need to start drilling in Anwar, and the outer continental shelf NOW. The "greenie weenies" can freeze to death in the dark if they want to, but they have no right to force the rest of us to dance to their misguided, off key, tunes.
    Reply | Link to Comment
  •  
    Jun 07 11:55 AM
    Felix' article is the kind of analysis you'd hear on a local radio talk show..or at a gas station, filling up the car. Exxon..or any number of private oil/oil related businesses..invest billions. It's just simply more difficult to find oil..and far more difficult technically to deliver and sustain product.
    Chevron, for instance, is now seriously contemplating a new pipeline to free Khazak oil from Russian control. A SMALL art of this line will cost over 1.5 billion..and you can bet that will end up being lapped several times over. The real culprit is Russia in the Caspian.
    National oil companies control over 80% of the worlds oil..and virtually ALL of its easier oil. Anyone who thinks there are clever political solutions or incentive taxes that will make the Exxons of the world more rational is living in the past. If Congress wants to try and beat on someone who really controls oil invite in Vlady Putin and see how far they get with him.
    Reply | Link to Comment
  •  
    Jun 07 07:22 PM
    XOM is in business for 1 reason. To produce maximum shareholder value. Tell Congress to beat down failing companies, like GM and Ford.
    Reply | Link to Comment
  •  
    Jun 08 12:12 PM
    It is about time that some writers understand the following, it is not about whether oil company A or Z wants to invest. It is about the fact that the oil industry for many years while trying to perform to the Wall Street Standard (WSS) did not hire people - actually reduced personnel as it is the easiest way to affect the bottom line - cut back R&D budgets and focused on easy oil.
    Service companies & drilling contractors in an effort to meet the WSS cut personnel, consolidated plants, merged and what we now have is not enough people and machinery better known in the service sector as capacity to satisfy the needs that are out there today. Add to that the "new oil", i.e. wells, with big flow rates are in deep water and/or very demanding environments which require significant investment and oil companies trying to meet their obligation to their shareholders have to be very careful on how they handle investment otherwise they are heavily criticized for poor management - just think about the Rockefellers complaining about XOM management performance!
    As previously mentioned, in the end it boils down to service company/drilling contractor capacity and enough personnel on the oil company side to tackle today's megaprojects. Sorry to break the news to some out there, they are not there!
    Reply | Link to Comment
  •  
    Jun 09 09:41 PM
    Expanding on "Right in San Francisco", 25 years ago I was getting up at 4:00 AM to sit in line for 2 hours hoping I could get enough gas to commute to work another week. The political noise was EXACTLY the same message we hear today!!! Become energy independent. The politicians have done nothing and the latest political hack wants to "confiscate" private company profits because Exxon makes too much money. The average employee at Goldman Sachs earned $400,000 last year and I don't hear anyone discussing that. Why not tax Microsoft or Berkshire Hathway for holding between 35 to 45 BILLION in cash!. What is too much money? Private equity and hedge fund managers make more than Fortune 100 CEOs each year.

    For close to 4 decades, close to 75% of Exxon profits have come from outside the U.S. They take massive political risk, have performed outstandingly for their shareholders, spent a fortune 30 years ago looking at shale, wind, solar, etc., and determined they were not feasible, helped build and manage the Alaskan pipeline (was this an environmental disaster or a boom to the economy of a US state). Exxon is by every standard the most efficient energy company on the planet. It is a firm employing 75,000 or so hard working bright taxpaying Americans.

    QUESTION: The Chinese or India come up with enough money to launch a hostile takeover bid for ExxonMobil. Will the US Congress perhaps do an about face to stop such a move? What do you think? When did facts get omitted in the discussion of serious issues? When did you ever think you would see a TV show titled "are you smarter than a 5th grader?" that proves too challenging for the average American?
    Reply | Link to Comment
  •  
    Sep 09 05:28 PM
    This is bit of "happy talk" trying to revert the opinion that oil is really getting scarce. When did the good king Abdullah say " leave it in the ground? When did he tell G Bush we can not produce more because we don't have it ? The later statement was not a matter of a lack of production ability but the reserves are minimal.

    As to Exxon itself it seems they are slowly shifting towards natural gas as a focal product and going to use LNG as a item to establish a high marginal price. The growing domestic NG industry such as CHK may not go along with this once they start to produce some of the " deep gas " aka geopressured.

    But then all life is uncertian and subject to external forces.
    Reply | Link to Comment
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