We have a pet descriptive phrase for energy executives who do well in rising commodity price markets but not so well in the down legs of their industry business cycles -- downhill bike riders. Last year we experienced a dramatic shift from the bullish phase of the energy cycle to the bearish phase. In 2009, we will begin to see who fits our description. One management that won't is the executives running the world's largest and now most profitable oil company -- Exxon Mobil Corp.
Prior to last summer, ExxonMobil was viewed as a super conservative oil company that couldn't think beyond oil and gas -- missing the new wave of alternative fuels. Environmentalists attacked the company for failing to embrace green technologies. Motorists and Washington politicians attacked it for making too much money on the backs of consumers. The company wasn't stepping up its capital spending to take advantage of the high and climbing oil and gas prices. ExxonMobil was so "old school."
In fact, shareholders chided management for their conservatism. What we missed were the laudatory articles about ExxonMobil being the most profitable company ever. We also missed the analysis of all the billions it could have made last year, but didn't because it adhered to a stricter standard in managing its affairs -- trying to maximize free cash flow while continuing to invest in projects that would extend the company's successful financial model well into the future. Last year, ExxonMobil returned $40.1 billion to shareholders through stock buybacks and dividends, or 154% of its exploration and capital spending. This topped its competitors Royal Dutch Shell at 37%; BP at 61%; Chevron at 67% and ConocoPhillips at 87%.
ExxonMobil is well positioned compared to many mid-tier oil competitors that have had their cash flow evaporate just when they need to fund expensive new field developments. The company today is positioned very much like a classic value investor. It was fearful about buying when others were greedy, and now it has the cash to be greedy when others are fearful. Is petroleum industry M&A on the way?
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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