ExxonMobil Takes Steps to Preserve War Chest As Profit Falls

Rex W. Tillerson, CEO of ExxonMobil
(Click to Enlarge)

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), May 1, 2009

Exxon Mobil Corp. is taking steps to preserve cash in the market downturn, positioning itself to take advantage of new investments and make acquisitions.

The extended global recession has dragged down oil and natural-gas prices from record levels last year, leading to a 58% drop in the global energy giant's first-quarter profit -- its worst performance since 2003.

Exxon's move to conserve its large, but shrinking, pile of cash will help preserve its financial flexibility and maximize its options for what is expected to be a bumper crop of fossil-fuel investment opportunities in coming months, analysts said.

Analysts and industry observers anticipate that there may be opportunities for Exxon -- and other big Western oil companies -- in Brazil, Iraq and elsewhere. There may also be assets and companies available, but it still isn't clear what might come on the market.

Exxon on Thursday said it is slowing its stock-buyback program in the second quarter to $5 billion, down from $7 billion in the first quarter and $8 billion in last year's fourth quarter. The Irving, Texas, company ended March with $25 billion in cash, down $6.4 billion from three months earlier and $15.9 billion less than the same period a year ago.

First-quarter net income was $4.55 billion, or 92 cents a share, compared with $10.89 billion, or $2.02, a share, a year earlier. Revenue dropped 45% to $64.03 billion.

As oil prices marched toward a peak of $145 last summer, Exxon used its swelling profits to lower its debt and build up its cash reserves. That strategy has left the company on sturdy financial footing despite the recent slump in prices and demand, which has eroded profits. On Thursday, crude oil for June delivery rose 15 cents to $51.12.

Exxon, the world's largest publicly traded oil company by market value and output, this week said it is raising its dividend by 5% and that it has no plans to change its $29 billion capital-expenditure budget for 2009.

But with prices down 65% from last summer, Exxon's spending has exceeded its cash flow. The company reported $9.1 billion from operating activities and asset sales in the first quarter but spent $14.75 billion on its capital outlays, dividends and share repurchases.

Analysts said Exxon is acting prudently to preserve its war chest. "Everyone in the market knows the chance there will be an interesting market opportunity in the next 12 months is increasing," said Tina Vital, an equity analyst with Standard & Poors. "They want to position themselves to keep the most options open."

Exxon officials on Thursday pointed out that the company remains strong despite the downturn. "If you don't let your checkbook get out of control in the good times, you don't have to slam on the breaks and disrupt the organization in the bad times," said David Rosenthal, Exxon's vice president of investor relations. "The most important thing for our shareholders is we are not constrained in our ability to take advantage of opportunities that would present themselves," he said.

While Exxon has the cash to ride out the slump in oil prices, many of its competitors and oil-rich nations are in more precarious financial positions. That should create more opportunities for Exxon to develop partnerships on overseas projects or purchase assets, something it avoided as prices climbed in recent years.

"Cash gives them added flexibility [to take a stake in] mega development projects with national oil companies," noted Fadel Gheit, an oil analyst with Oppenheimer & Co. He also pointed out that repurchased shares could be used to buy another oil company, though he said that the current political environment all but rules out huge mergers.

Exxon joins industry rivals in seeking to preserve cash without sacrificing future production prospects. Chevron Corp., the second-largest U.S. oil company behind Exxon, this week said it wasn't raising its dividend in April, as it had for four years. Earlier this year, Chevron ended a $2 billion-per-quarter share-buyback program.

Royal Dutch Shell PLC and BP PLC took on additional debt in the first quarter to maintain current spending levels.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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