The Rising Influence of Rising Affluence

[DewDiligence]

Exxon 2Q09 Profits Plunge Year-Over-Year on Lower Oil Prices

[XOM’s year-over-year production fell 3%; this was not as bad as Shell’s 5% drop and Total’s 7% drop, but it was much worse than the production gains at CVX and COP. Unlike some oil majors, XOM has not cut costs aggressively; insofar as XOM has the financial resources to invest for the long-term, it makes sense, IMO, for them to do so.]

http://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090730_219469.htm

›July 30, 2009, 2:56PM EST
By Steve LeVine

The plunge in oil prices over the past year hit hard at ExxonMobil (XOM), the world's largest publicly traded oil company. Its profit dropped by two-thirds in the most recent quarter. Short of a sharp spike in oil prices, the company appears likely to burn through its cash on hand by the end of the year, which may force it to reduce or eliminate its massive stock-repurchase program.

Exxon's second-quarter profit dropped by 66% from the same period last year, to $3.95 billion, or 81¢ a share in the second quarter, from $11.68 billion, or $2.22 a share, a year earlier. Cash on hand plummeted to $6.3 billion, from $29.4 billion in the second quarter of last year. Oil and natural gas production dropped by 3%.

Just last year, Exxon recorded the largest corporate annual net income ever, $45.22 billion. That included a $14.83 billion profit for the third quarter.

Industrywide Slump

The latest numbers were in line with those reported by other oil companies this week. ConocoPhillips (COP) said its profit dropped by 76% in the quarter compared with last year. BP (BP) said its earnings—like Exxon's—fell by 66% for the same periods. Shell (RDSa) reported a 70% drop in profits. In a conference call with analysts, Shell CEO Peter Voser said he is not optimistic about a rapid turnaround. "Conditions are likely to remain challenging for some time, and we are not banking on a quick recovery," Voser said.

Much of Exxon's drop in profit reflected the direction of oil prices since last year [duh]. Oil averaged approximately $59 a barrel in the second quarter this year, compared with about $124 a barrel in the same period last year, or less than half the price.

But the fall in cash on hand is particularly striking, since this metric has been one of Exxon's points of advantage over rivals. [I don’t agree—the fall in cash stems largely from the very aggressive share-buyback program.] Some of those other companies have had to borrow money during the current slump to finance capital spending and dividends.

Costly Stock Buybacks

The shrinking cash pile reflects a combination of falling cash flow and the Irving (Tex.) company's continued aggressive stock buybacks. Exxon's cash flow was $2.2 billion in the second quarter, compared with $13.4 billion in the same period of 2008. And the share buybacks—it repurchased some $5 billion in shares in the second quarter, or about 1.5% of the total outstanding—are one of the company's strategies for propping up its share price by reducing the volume of shares on the market. Since the beginning of the decade, Exxon has taken more than 20% of its shares off the market through such buybacks. Unless oil prices rise and cash flow increases, another two quarters of such buybacks this year would more than burn through the rest of the cash. [So? There is no requirement that XOM continue these buybacks—they are completely discretionary.]

Still a Safe Haven?

Considering the times, CEO Rex Tillerson thinks the company did well. "Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and reduced demand for products," Tillerson said in a statement. "In spite of these challenges, ExxonMobil achieved solid results."

Mark Flannery, an oil analyst with Credit Suisse, said the report was below his forecasts, and that he didn't see much positive in it. "This is an unusually bad miss from [Exxon] and is concentrated in a core operating division [international exploration and production], which will raise red flags over [its] safe-haven status" among major oil companies, Flannery wrote in a note to clients.

In a conference call with analysts, David Rosenthal, Exxon's vice-president for investor relations, repeated the company's mantra that it doesn't focus on quarters, but on the long term. He suggested that Exxon will stick with its strategic plan regardless of the direction of oil prices and the economy. "In the near term, it's difficult to predict the timing of global economic recovery," Rosenthal said.‹