ExxonMobil may be heading for its steepest profit decline since 1999

ExxonMobil, coming off its worst share drop in 27 years, may be heading for its steepest profit decline since the 1999 merger that created the company. For Chief Executive Officer Rex Tillerson, it's time to expand.
Tillerson, starting his fourth year leading the world's largest company by market value, said in December that he may increase capital spending by 20 % this year to $ 30 bn. The increase will mark his biggest push to discover oil fields and boost fuel and chemicals production.

Exxon's $ 36.7 bn cash hoard, which exceeds those of Microsoft and Warren Buffett's Berkshire Hathaway, gives ExxonMobil the unique opportunity to buy assets cheapened by a $ 100-a-barrel plunge in crude prices, said analyst Neil McMahon of Sanford C. Bernstein & Co. in London. Investing now will mean a return to record profits when the world's largest economies recover and fuel demand rebounds, McMahon said.
"I consider it a very wise move on the part of Exxon because they're taking a long-term strategic perspective on energy," said Nansen Saleri, president of Quantum Reservoir Impact, an advisory firm in Houston, and former chief manager of oil fields for Saudi Arabia's state oil company. "The energy requirements of the planet will go up once the financial markets shake off the current crisis."

Irving, Texas-based ExxonMobil may report its lowest profit in more than four years after crude tumbled 56 % in the fourth quarter. Net income probably dropped 37 % to $ 7.32 bn, or $ 1.40 a share.
Full-year profit for 2009 will probably fall 45 % to $ 24.9 bn, analyst estimates showed, halting a five-year streak of gains during which profit more than tripled and cash on hand ballooned fivefold. ExxonMobil reaped $ 186 bn in net income in the past five years, exceeding the annual economic output of Malaysia, the Philippines and Pakistan.

ExxonMobil shareholders were left behind when crude futures surged to a record $ 147.27 a barrel in July. While oil producers such as Chevron and Petroleo Brasileiro benefited from oil's rise during the first half of 2008, ExxonMobil dropped almost 6 % as Tillerson amassed cash and bought back stock rather than bolstering output.
After Lehman Brothers Holdings' Sept. 15 bankruptcy filing started a meltdown of global credit markets, ExxonMobil's cash became a source of strength rather than a sign of weakness, said Gianna Bern, president of Flossmoor, Illinois-based Brookshire Advisory & Research and a former BP oil trader.

Top performer
Royal Dutch Shell, StatoilHydro and EnCana are cutting budgets or delaying projects because of slumping energy prices. ConocoPhillips, the third-biggest US oil company, said Jan. 16 that it will reduce capital spending this year and pare its workforce by 4 %.
ExxonMobil plans to disclose its 2009 capital-spending plan on March 5. At $ 30 bn, spending would amount to $ 82 mm a day to rent drilling rigs, hire roughnecks and install fuel-producing units in refineries. ExxonMobil processes about 7 % of the world's crude and makes more gasoline and diesel than any other company.

Target of criticism
As recently as May, when oil was on its way to a record $ 147.27 a barrel, politicians such as US Representative Edward Markey, a Massachusetts Democrat, criticized ExxonMobil for stockpiling cash.
"Big Oil is spending their profits to prop up their stock price rather than on discovering and delivering alternatives to $ 4 gas," said Markey, who introduced a bill that would impose a fee on stock buybacks by oil companies.

Conserving cash put ExxonMobil in a position to fund exploration without resorting to borrowing, Tillerson told in December after giving a speech in Chicago. ExxonMobil's biggest opportunities to load up on reserves are in Brazil, home of the Western Hemisphere's largest petroleum discovery in three decades, and West Africa, Bernstein's McMahon said in a Jan. 9 note to clients.
Brazil's state-controlled oil company, Petroleo Brasileiro, is short of cash to develop deepwater fields hundreds of miles from shore, McMahon said. Petrobras, as the Rio de Janeiro-based company is known, failed to replace 73 % of the oil and gas it pumped from the ground last year, according to a Jan. 16 public filing with US securities regulators.

Deep pockets
The Brazilian company said earlier that it plans $ 174.4 bn in capital spending over the next five years, financed partly with state loans.
"With Petrobras seemingly struggling for financing, while deep-pocketed ExxonMobil wants a much bigger position in Brazil, this could be the ideal time for the two companies to form a joint venture," McMahon said.

Tillerson said he's unlikely to lead acquisitions of entire companies because prices remain inflated. Partnerships with oil-rich nations work better because they allow ExxonMobil to obtain reserves in exchange for financing and technical expertise, he said.
"Our financial strength is important in massive project developments," Tillerson said. Government-owned oil companies in countries such as Nigeria have an easier time borrowing money for rigs and pipelines if they form a partnership with ExxonMobil, giving lenders confidence the projects will be completed, Tillerson said.

Return to normalcy
"The state-owned oil companies are going to have to look to Exxon out of fiscal necessity," said Brookshire Advisory's Bern. "National oil companies may be sitting on large reserves, and that's fine, but they need someone to help them get that out of the ground. Exxon is going to be king of the hill."
ExxonMobil isn't discouraged by the plunge in crude prices because the company keeps costs low enough to profit when oil slumps, Tillerson said. New York futures traded as low as $ 32.70 a barrel earlier, down 78 % from July's all-time high.

"All this talk when prices were high that we were in a different age and the world would never be the same was nonsense," Tillerson said. "Commodities are still commodities. These things tend to run on kind of 10-year cycles."
"When there is a return to normalcy we should see a rebound in demand for energy," said Quantum's Saleri, a University of Virginia-trained chemical engineer who managed Chevron's oil fields for 18 years before joining Saudi Aramco in 1992. "This is a very appealing period for decision making."