Cash Question Still Looms Over Exxon Mobil

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Oil Daily

After creeping steadily higher over the last four years, Exxon Mobil’s capital spending has hit a ceiling, with the oil giant expected to spend $20 billion-$21 billion per year through 2010.

Exxon Chief Executive Rex Tillerson explained earlier this week that if spending jumped above that level, the company’s ability to successfully execute its upstream projects may be compromised.

“We have a pretty good sense of what our capabilities are and the level of activity that we’re confident we can manage well. We don’t want to go beyond that and begin to erode the results from those investments,” he said.

“At this point, we’re very comfortable with our ability to execute at this level,” Tillerson said Wednesday at the company’s annual analyst meeting in New York (OD Mar.8 ,p1).

With Exxon‘s cash pile growing and spending staying flat, Exxon shareholders can expect more cash to come their way. “Management seems wedded to share buybacks as the primary vehicle to redistribute excess cash flow,” noted Citigroup’s Doug Leggate. Assuming Exxon continues buying back shares at a pace of $7 billion per quarter, such buybacks would add 7% to annual earnings per share.

“Use of cash remains high on the agenda — but against the backdrop of a notional capex ceiling, top-line production growth feasibly translates to higher free cash flow and even greater capacity for share buybacks that are already at levels material to earnings per share,” said Leggate.

In 2006, Exxon‘s share buybacks totaled an industry-best $29.6 billion. Repurchasing so much common stock reduced shares outstanding by 6.6%. For the year, Exxon‘s overall net income was up 9% year-over-year, but the effects of the buybacks helped lift the company’s earnings per share by 16%.

Assuming oil prices stay at their lofty levels, the Exxon cash-generating machine will continue working at full strength. A.G. Edwards’ Bruce Lanni notes that the company generated cash flow from operations of $98 billion over the past two years. Of that nearly $100 billion, $56 billion was returned to shareholders and another $38 billion was reinvested in the business.

News that Exxon‘s spending will stay flat over the next few years — while money returned to shareholders will continue to grow — isn’t likely to please politicians and consumers groups. With Exxon‘s cash pile growing as a result of years of strong commodity prices, there have been calls for Exxon and others to significantly ramp up spending in a bid to bring more supplies to market. In particular, Exxon has been criticized for returning more cash to shareholders than it budgets for capital projects.

One group — the Foundation for Taxpayer and Consumer Rights — recently attacked Exxon, saying the company continues to hoard tens of billions of dollars rather than invest in refineries and oil alternatives.

Many Washington politicians also have blasted Exxon and others for failing to do more to bring additional oil supplies to market. Some oil company executives have argued in the past that they would like to budget more for upstream projects, but the number of opportunities to profitably invest in the US and elsewhere are limited.

Consumer Watchdog
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