Economy Forces Some Oil Cos to Cut Buybacks

HOUSTON (Dow Jones Newswires), Dec. 16, 2008

Cash-rich oil companies are not going to save the holidays for disheartened investors as the economic crisis forces Big Oil to cut back on share-buyback programs.

Major oil companies made investors happy in recent years by steering billions they garnered from high oil and natural gas prices to share repurchases. When oil prices soared, companies had money to invest in these programs, and increase dividends, boost their spending in capital projects and even make some acquisitions.

But as the financial crisis worsens and oil prices fall - hovering at about $44 Tuesday or more than $100 below its all-time high in July - major oil companies now have to be cautious and prioritize spending.

The result: Some companies like BP PLC have stopped buying their own stock as a way to preserve liquidity. The company has also hinted it will reduce its program substantially next year. More oil majors are expected to follow suit.

These revisions are the first sign that even financially strong international integrated energy companies are changing course in order to weather the economic crisis. Cuts in the buyback programs are also pushing analysts to reduce their earnings per share estimates for next year.

However, oil majors are expected to continue with their generous annual dividend increases and remain a favorite destination for "safe-haven" inflows, analysts said.

"If oil prices stay at these levels it's almost certain they (major oil companies) will want to cut their share-buyback programs," said Jason Gammel, an energy analyst at Macquarie Securities in New York. "But this won't necessarily move investors from these stocks."

Shares of most major oil companies were up Tuesday. Exxon Mobil Corp.'s stock rose 1.5% to $81.16, shares of BP were 1.2% higher at $48.33, and ConocoPhillips gained 1.4% to $52.61.

Spending Priorities

On Dec. 5, Credit Suisse cut its earnings-per-share estimates for BP mainly because the British oil giant recently said it will stop repurchasing shares, and that it will reduce its program over time. After spending $2.9 billion in share buybacks in the first nine months of 2008, BP decided to halt the program in the fourth quarter.

Other smaller producers such as Devon Energy Corp. have also put on hold their share-buyback programs. All major oil companies have made it clear that buying back stock is not a priority for them in the current environment.

ConocoPhillips on Monday said it would delay its announcement of its capital spending and share-buyback plans until January.

"Our concentration is to live within our means, which is going to be a strong balance sheet, maintain liquidity and cash position, and credit capacity; fund our capital program," said Conoco Chief Executive Jim Mulva in a recent conference call with analysts. "And as to the extent that we see a better market price and better credit markets, then we would consider taking leverage up and buying our shares."

Exxon and Royal Dutch Shell have echoed this approach, saying their top priorities are to fund robust investment programs and increase dividends.

Before the downturn, executives felt that by reinvesting in their companies' stock, shareholders would get better returns than alternative investments. But some analysts disagreed, as they thought oil companies should be investing in high-return projects or buying other companies, which would offer higher returns and help firms increase declining reserves.

"Part of the problem with the share buybacks is that as we got to the end of that cycle, the companies were having increasing difficulty showing what the benefits were going to be of that capital staying in the share buybacks," said Amy Myers Jaffe, an energy researcher at the Baker Institute at Rice University in Houston.

Market observers said Exxon Mobil, the largest U.S. oil company by market value, is probably one of the few majors that can afford to keep buying back stock at the same pace, as it has about $37 billion in cash reserves. In the third quarter, the Irving, Texas, company spent $8 billion buying back shares.

Exxon Mobil typically doesn't provide guidance on how much it will spend repurchasing shares, but Exxon Chief Executive Rex Tillerson said Thursday that the cash the company has available will continue to be targeted at dividends and share buybacks, as well as capital projects.  

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