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Exxon: Juggernaut or Dinosaur?
Cautious, rigid, and uninterested in alternative fuels, the wildly successful oil behemoth is lumbering ponderously into the future

http://www.businessweek.com/magazine/content/09_07/b41190346......

C.


"Exxon is surprisingly vulnerable. Interviews with industry analysts, consultants, and current and former employees cast doubt on its strategy and growth prospects".

A few years ago, Forbes published an interview with the then President of Enron -- Skilling. In that interview, Skilling used the same figure of speech that is used in this Business Week article, to refer to Exxon as a "dinosaur" headed for extinction.

An article which simply praises Exxon is not an article that grabs people's fancy. But if on the other hand you are an author that develops an intriguing opening theme by implying that Exxon has some "surprising vulnerabilities" (which means I, the author have discovered something no one else has discovered) -- it grabs a readers curiosity. Then to further enhance his credibility the author adds a little salt and pepper by clearly stating that he has been checking with "analysts", "consultants" and "current and former employees" and have found that in their collective opinion (of these unknown sources), the success of Exxon's future strategy is in doubt. Then you have an attention grabber.

To support the collective assessment that he claims he sought to conclude that Exxon's strategy is vulnerable, the author sprinkles the story further with a few legitimate statistics showing how Exxon has been losing market share, and has failed to measurably grow its reserves placing future growth in doubt.

I am not saying that all of this businessweek author's opinion are not valid, on the contrary they are legitimate observations. However, where I believe the article is vulnerable in its assessment of Exxon's success, is that the strategy the author claims is in "doubt" is no different in many ways than the strategy that Exxon successfully executed during the 80's and 90's.

There is something interesting the author really failed to recognize and that is that today's enviroment offers Exxon a very great and distinctive advantage it did not have during the decade of the 80s and 90s. That tremendous advantage to its strategic position is that "cheap" financing is nowhere to be seen in the horizon, and thus Exxon's competitive position has been stregnthen tremendously.

It is sitting on the cat's bird seat and it will have the ability to pick and choose projects as it pleases-- and to drive hard bargains in the process. When Exxon has leverage, it is merciless. And in this decrepit financial environment with $30+ billions in the bank, leverage it has.

Is losing market share (deliberately) a measure of a failing strategy? Let's see.

When Exxon bought Mobil in 1999 Exxon had shed at least 1/3 of its volume and market share from the peak of its halcyon days of the 70s. It was able in this single act, to wipe out all the market share it had lost for 20 years, and then some more.

In effect Exxon had shed market share over the years that was too expensive to retain but acquired it back cheaply, much cheaply than its competitors when it bought Mobil.

I suppose an analyst could have legitimately concluded during those years that Exxon was "lumbering ponderously into the future" following a failing strategy.

For twenty years I suffered the irritation of listening over and over to how wonderful Shell's aggressive growth strategy was, blah, blah...

And by the way during those two decades, as one would expect, there was no shortage of "analysts" and "consultants" that would periodically criticize Exxon for "poor" volume growth.

I should add, that all of this was happening at a time when other competitors were growing volume and market share by paying hefty premiums to retain and or improve their reserves. But unhappily as history has shown some of these competitors later found themselves having to write-off a big chunk of that market they had so aggressively protected or the assets they had so vigorously pursued by overpaying for them. None of these points were discussed or even insinuated in the article, that I can recall at this time.

Exxon lost market share in the 80s and 90s, and they did it deliberately.

Their philosophy is that they will stay in a business as long as the business meets the minimum return criteria. When it does not, Exxon usually either tries to fix the problem, if it is feasible to fix, or it sells it and get's out.

Look at ConocoPhillips, it grew reserves, it grew volume and..... it wrote off over $31 billion dollars in this latest quarter. Why did this happen? Because the volume growth that ConocoPhillips achieved was too expensive for prices at $35 to $45/B. I wonder where are today those analysts and consultants that applauded the "visionary" Mulva for having acquired Burlington Resources.

Exxon, on the other hand, has refused to pay those big up front sign in bonuses that have been so common in the last few years. Big bonuses that some of our other competitors have been willing to pay to gain access to new oil plays.

Exxon, on the other hand preferred to be "cautious" (referred to in the article as "rigid". To either build up cash or increase its buyback of stock when acquiring new reserves were considered too pricey.

The author could have enhanced its analysis and its contention had it shown that Exxon had wasted a lot of money buying back its stock. It would have been interesting and educational to the reader to have seen a comparison of the cost of buybacks and the corresponding increase of reserves per share, as compared to the equivalent cost to achieve the same growth per share by our competitors.

Market share growth, and reserve additions per se, should not be the measure of success, or at least not the exclusive measure of measuring the success of a strategy. To me the key measure of success should be shareholder value, which by the way has a very strong correlation with return on equity or return on capital.

Versus its peers, have Exxon shareholder value grown more or grown less than its competitors? If it had grown less, then the market would agree with the author that Exxon's strategy is flawed or vulnerable. But if on the other hand, Exxon has done better than its competitors, then the market has spoken.

One needs to ask as simple question -- why is Exxon's P/E higher than its competitors? Does the market grant a P/E of 14 to a company that the market believes is following a flawed strategy, especially at a time there is so much fear in the market? I think, not.

So my conclusion is that this article illustrates to me along with other analysts, and other similar authors that write these doom and gloom predictions about Exxon without examining and telling the reader a little more about why the strategy the company is pursuing is going to fail, is a clear indication that to me that they do not really understand Exxon's invesmtnet philosophy and strategy.

If prices stay down for a while, and that is still a big if, the wisdom of Exxon's "rigid" investment philosophy will be evident for all to see.

Madame Butterfly
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