[R-G] Exxon's Texas-Size War Chest

[Yoshie Furuhashi]

Ideologues complain that national oil companies, which may subsidize
domestic oil consumption and whose revenues may finance non-oil
projects, tend to invest less in exploration and production than oil
majors, but a Baker Institute study last year shows that, "Instead of
favoring exploration, the five largest IOCs [International Oil
Companies] have used (in 2006) 56% of their increased operating cash
flow on share repurchases and dividends."  Big Oil demands a high
return on capital, and it refuses to invest in projects that doesn't
meet its standard of profitability.  Capitalists, unlike neo-cons, are
not risk-takers.-- Yoshie

<http://dealbook.blogs.nytimes.com/2008/05/28/exxons-texas-size-war-chest/>
Exxon's Texas-Size War Chest
May 28, 2008, 5:23 pm

The oil industry is known to be very conservative. And Exxon Mobil,
the world's largest publicly traded oil company, may be the most
conservative of the bunch. It refuses to invest in projects that would
lower its industry-leading return on capital employed, which is now
around 35 percent. Rather than use its phenomenal cash flow for huge,
dilutive acquisitions, it prefers to spend billions of dollars to buy
back its own stock.

But it isn't as if Exxon Mobil is taking those shares and setting them
on fire. The oil giant appears to be squirreling them away — waiting
for just the right time to strike. Or it sure seems that way, given
the response that Rex Tillerson, Exxon Mobil's chairman and chief
executive, gave to a shareholder at the company's annual meeting on
Wednesday.

The shareholder was inquiring about the board's decision to repurchase
company stock, as opposed to using that money to fatten its dividend.
Mr. Tillerson explained to the shareholder that Exxon Mobil had indeed
increased its dividend over the years, but now chose to buy back large
amounts of stock because it was in the best long-term interest of
shareholders.

He went on to say that Exxon used the same technique in the 1990s.
Exxon bought back enormous amounts of stock and put it aside, listing
the shares on its balance sheet as "common stock held in treasury."
Then in 1998, when oil prices crashed to a now amazingly low level of
about $10 a barrel, it made its move — and used those shares it stored
away to buy rival Mobil in an all-stock transaction worth around $80
billion.

Since Exxon had bought back the shares at prices far lower than what
its common shares were currently trading at, it essentially paid a
fraction of the cost it would have if it issued new shares at market
prices to buy Mobil.

Once again, Exxon Mobil has amassed a large pile of common stock held
in treasury. At the end of 2007, the company had 2.367 billion shares
held in treasury, for which it paid $113 billion over the last 10
years, according to a regulatory filing. If that stock were valued at
the current market price of $90 a share, it would be worth $237
billion, or $124 billion more than what Exxon Mobil originally paid
for it.

However you look at it, that's one Texas-sized mound of dry powder.

So what could Exxon Mobil buy with a quarter-trillion dollars in
stock? ConocoPhillips has a market capitalization around $140 billion,
so Exxon Mobil could snap that company up whole and give a modest
premium to shareholders, if it were so inclined. The second-largest
United States oil company, Chevron, has a market capitalization of
around $206 billion, so Exxon Mobil could swallow it up instead.

Just to be clear: With oil prices hovering around $130 a barrel, it is
very unlikely that Exxon Mobil will go on a spending spree anytime
soon. It is, after all, the most risk-averse of oil companies when it
comes to deal-making.

But Exxon Mobil isn't using its stock buybacks to liquidate itself or
to take itself slowly private. Rather, it appears to be waiting for
the right time to make a deal, and when it does, it will likely be in
grandiose, Texas style: Big.

-- 
Yoshie
<http://montages.blogspot.com/>