A Two-headed Giant Dilemma
Some call Exxon Mobil a shining star. Others say its stodgy style cries out for a total makeover
For Exxon Mobil, it's not enough to deliver whopping profits. So many investors bolted when it recently reported 44 percent growth in first-quarter earnings--yes, 44 percent --that the stock fell to its lowest point in 11 weeks. Why the sudden exodus? Earnings were a nickel a share less than expected.
But Wall Street's high expectations for the world's largest oil company are nothing compared with the monumental goals set by the global oil market. In the past year, the corporate titan began pumping oil and natural gas from eight major new fields, including challenging projects in the deep water off Angola's coast, the icy depths of the North Sea, and the tough terrain of landlocked Chad. Yet Exxon's production continues to slip. Even these significant additions couldn't make up for the inexorable decline of the company's vast mature fields around the world.
On the one hand, the Irving, Texas-based monolith appears to be flourishing, surpassing its nearest peer, General Electric, earlier this year to become the nation's largest corporation by market value. But Exxon is denounced by critics as hopelessly mired in the past, blind to environmental realities, and hamstrung by an autocratic management style, embodied by its longtime chief executive, Lee Raymond.
So which is the real Exxon? A shining example of corporate excellence well positioned for the future? Or a lumbering giant headed for a fall? There's plenty of support for both views, simply because Exxon's fortunes depend on a commodity as volatile as it is vital to the world economy, oil.
Minting money. Of course, Exxon's hallmark is its conservative approach, one that the company says helps keep it atop the heap through all of the industry's ups and downs. "Our organization and our strategies are designed to see through the market noise created by short-term fluctuations," Raymond told Wall Street analysts earlier this year. (Exxon declined requests for an interview for this article.) Although the style may seem "boring," he said, "You'll just have to live with outstanding, consistent financial and operating performance measured in the same transparent way we've done for the last 20 years."
Over that time, business has rarely been as good as it is today. With oil averaging more than $50 a barrel this year, oil companies have been minting money, none more quickly than Exxon. Its $82.1 billion first-quarter revenue is greater than the total annual economic output of most countries. Its $7.9 billion profit easily topped that of its competitors. The company is amassing cash at an astonishing rate; its hoard swelled from $23 billion to $30 billion in just the first quarter. And much of that money is going right back into the company. Exxon is buying back its stock at its fastest pace ever, spending $3.5 billion this quarter alone.
With worldwide demand for oil skyrocketing, however, some critics say Exxon should be spending that cash ferreting out new oil sources. Last year, overall capital spending was down 4.1 percent, to $14.9 billion. That means it is spending less on exploration for new prospects at the same time its older fields, like those in North America, are in a natural decline. The company's production eroded nearly 5 percent in the first quarter, a rate that surprised analysts and caused Exxon to miss earnings projections.
All oil companies are grappling with moribund field production, as well as with the political reality that many countries with large untapped oil and natural gas reserves are closed to foreign capital. While other companies are working to address these issues, however, Exxon exudes a Zen-like calm. It was notably absent among this year's winners in Libya's first round of oil exploration licensing since U.S. sanctions were eased; smaller rivals Occidental Petroleum and Amerada Hess prevailed. "There's not a country in the world that we just have to have a presence in," company President Rex Tillerson told analysts in March.
Slowpoke? Exxon has shown little concern about its reserves, even though by the government's accounting method, it replaced only 83 percent of the reserves it depleted last year. According to its own accounting, Exxon said, it replaced 112 percent. Some analysts say Exxon is a slowpoke because the world is running short of the huge prospects it needs to replenish its giant base. The company disagrees. "While we are not opportunity constrained," Raymond says, "we are patient, and we are disciplined."
An engineer who joined Exxon in 1963 and became chairman 30 year later, Raymond runs the company as a man who has seen oil prices plummet just as rapidly as they have risen, observers say. He won't pay a premium for new projects, in other words, when the price of oil could be far lower in the future. "They only invest if there's a high degree of certainty that the return on investment would be significantly above their required rate of return," says Oppenheimer & Co. analyst Fadel Gheit, "which happens to be the highest in the industry,"
Unlike other companies, Exxon can afford to wait. For example, Deutsche Bank analyst Paul Sankey pointed out last year that Raymond was an early skeptic of liquefied natural gas. But now that LNG is poised to be a major presence in the U.S. market, Exxon leads the world in the volumes it plans to handle. The 1998 merger with Mobil gave Exxon major LNG assets as well as an important relationship Mobil had established with Qatar, home to the world's second-largest natural gas reserves. Those familiar with the deal say that Mobil could not have capitalized as well on the alliance without Exxon's money and technological expertise. In 2003, Exxon signed a $12 billion deal to export LNG from the emirate, following up last year with a $7 billion investment in a cutting-edge gas-to-liquids project.
Fast track. Exxon's technological advantage means that most countries will always look to do deals with it. A prime example is off the shores of Angola, where Exxon employs an electromagnetic technology developed by a former NASA scientist. Production began last year from the Kizomba project, the world's largest floating oil-production platform, a record three years after Exxon signed on. "Their projects get completed very quickly," says analyst Jacques Rousseau of Friedman, Billings, Ramsey. "So if you're a host country in Africa or the Middle East, and you're dependent on those revenue streams and how well they run, Exxon has a very strong track record."
Exxon's self-assuredness, in the view of many, translates to arrogance in its public-policy dealings. The legacy of the 1989 Valdez disaster lives on, partially because Exxon continues to fight a $4.5 billion punitive-damage judgment in a lawsuit filed on behalf of fishermen and others hurt by the Alaskan oil tanker spill. The company points out that it paid $1 billion in settlements with state and federal governments, $2.2 billion on Prince William Sound cleanup, and $300 million to compensate those affected by the spill. Exxon has steadfastly maintained that the punitive award was "excessive." Former Alaska Gov. Tony Knowles implored Raymond to settle the case: "He basically told me, 'We'll settle that in court,' period, with a hard, cold look."
Even more contentious is Exxon's stance on whether the burning of petroleum is causing global warming, an issue that will be raised at its May 25 shareholder meeting. Shareholder activists withdrew climate-change resolutions at six oil and gas companies after executives agreed to meet. But Exxon declined such a sit-down. At last year's meeting, Dale McCormick, then the treasurer of Maine, asked Raymond if she could pose a question on how the company was preparing for potential costs if it were ever held responsible for harm due to climate change. Raymond responded, "You can pose anything to me," but whether he would answer was "a different question." McCormick believes he inappropriately made her the object of ridicule, given that she represented 3 million shares in the Maine state retirement system.
No laughing matter to environmentalists is Exxon's funding of research that has cast doubt on climate-change science, as well as its bankrolling of groups that oppose environmental regulations and U.S. participation in the Kyoto Protocol. Critics contrast Exxon's attitude with that of the No. 2 oil company, BP, which not only has an internal program to reduce greenhouse gas emissions but has also invested heavily in alternative energy. "Exxon Mobil is probably the only supermajor that has not been involved in the solar industry," says Rhone Resch, president of the Solar Energy Industries Association. "I think that BP and Shell and ChevronTexaco view themselves as energy companies, and Exxon Mobil views itself as a petroleum company."
Exxon's detractors say that way of thinking emanates from Raymond, who dismisses the notion that the world will retreat from fossil fuels this century and who questions the profitability of renewable energies. "Exxon is the soul of corporatism," says shareholder activist Robert Monks, who has proposed separating the chair and chief executive positions--an item Exxon kept off its proxy ballot this year, although it garnered 27 percent of shareholder votes last year. Says Monks: "It is the company that most clearly represents centralized power and unelected officials having an unacceptable impact on life in a democratic society."
With company coffers awash in earnings, the Exxon board seems perfectly happy with Raymond, having kept him on two years past the normal retirement age of 62. His presumed successor, Tillerson, is considered an equally conservative choice. "They are not in the business of making friends; they're in the business of generating profits for the shareholders," says Oppenheimer's Gheit. Other companies might try to distinguish themselves through slogans or PR, but they aspire to Exxon's profit per barrel, about $1 higher than that of its competitors. Says Gheit, "They are the gold standard the other oil companies in the industry follow."
This story appears in the May 16, 2005 print edition of U.S. News & World Report.