Exxon: A Tiger That Doesn’t Change Its Stripes; Rewards of Consistency and Capital Discipline Are Enduring for Exxon Investors
October 31, 2013 Leave a comment
Exxon: A Tiger That Doesn’t Change Its Stripes
Rewards of Consistency and Capital Discipline Are Enduring for Exxon Investors
SPENCER JAKAB
Updated Oct. 30, 2013 2:36 p.m. ET
Hoping visitors simply wouldn’t notice, a Chinese zoo swapped its lion for a dog this summer. Owners of Exxon Mobil Corp. XOM -0.13% could be forgiven for thinking the energy giant has replaced the tiger in its tank with a pussycat. Over the past five years, the energy giant’s share price has lagged 46 percentage points behind a leading exchange-traded fund used to gain exposure to the oil-and-gas sector—quite a bit, considering Exxon is its largest holding. Thursday’s third-quarter results aren’t likely to help much if income from refining and marketing continues to sag.
During the second quarter, those so-called downstream earnings collapsed to $396 million, from $6.64 billion a year earlier. Tepid results earlier this week from Valero Energy Corp.VLO +2.98% , a pure-play on that sector, don’t bode well. Analysts have cut their expectations for Exxon’s third-quarter earnings by about 8% in just the past month, to $1.82 a share. It earned $2.09 a year earlier.
Exxon’s problem is growth or, rather, lack thereof. Management is targeting volume increases of just 2% to 3% a year in its exploration-and-production, or upstream, output. This has lagged behind expectations in recent years.
There’s a silver lining, though: Through booms and busts, Exxon has used cash that might have gone to juicing output to reward shareholders. The sums are impressive: some $327 billion in payouts since oil prices bottomed in 1999—about two-thirds through share buybacks and the remainder from dividends. That’s enough to buy rival BP BP +0.85% PLC twice and have plenty of change left over.
What do investors get for such consistency? Recent subpar share-price performance aside, Exxon earns superior economic returns of the sort valued by long-term shareholders.
Its average return on invested capital over the past five years is 25.3%—well ahead that of its closest rival, Chevron Corp. CVX -0.99% That is about double the returns earned by Europe’s four big oil companies, Total SA, FP.FR +0.20% BP, Royal Dutch ShellRDSB.LN +0.55% PLC and ENI ENI.MI +1.33% SpA. In other words, Exxon has reinvested fewer dollars but earned far more on them.
Oil prices and refining margins rise and fall. The rewards of consistency and capital discipline across those cycles are hard to recognize up close. With a little perspective, though, Exxon looks every bit the top dog.
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