Exxon Shares Sinking to Levels They Richly Deserve

Includes: COP, CVX, XOM
by: Philip Davis

I've mentioned in previous articles how ridiculous it is that ExxonMobil Corp. (NYSE:XOM) is valued at $423B, having added $200B in market cap since 2004.

Heck, the company was trading at $57.50 in January of last year when oil was at $65 a barrel, on its way to a summer high of $79. In comments today Pitch78 mentioned how Cramer said he was "blindsided" by the ConocoPhillips (NYSE:COP) disclosure of poor margins after saying "a lot of really good things at its meeting a few weeks ago."

Yeah, well if my due diligence on a company consisted of listening to the management's outlook, I'd be blindsided a lot too! The management of Conoco Phillips, Exxon, and Chevron Corp. (NYSE:CVX) are no smarter than the people who run our government. They stepped into the helm of huge, profitable mega-corps with the general instructions that they should not screw it up and they would keep making money just like the last 20 CEOs did.

They all just happened to be in the right place at the right time this decade when their commodity got hot.

We won't get into the reasons behind HOW they got hot, let's just say that a confluence of global economic and political events came together and caused a fortuitous increase in the value of their commodity -- and please ignore the man behind the curtain!

Let's just say that our pals in the oil industry took full advantage of the situation to maximize profits!

Now the party is winding down and suddenly the pressure is on for these guys to do something smart... It ain't going to happen! COP already did something monumentally stupid, buying Burlington Resources for $36B last December when natural gas was trading at $14 (now $6) and, more importantly, paying a valuation that was THREE times higher than the valuation of Conoco's own reserves. At $92 a share, COP bought Burlington at the top AND gave them an extra $6B.

What does that have to do with Exxon? Well since 2004 Exxon has gained the ENTIRE combined market cap of Conoco/Phillips/Burlington ($112B), plus Sunoco Inc. (NYSE:SUN) ($7B), Suncor Energy Inc. (NYSE:SU) ($12B), Valero Energy Corp. (NYSE:VLO) ($30B), Halliburton Co. (NYSE:HAL) ($29B) Nabors Industries Ltd. (NYSE:NBR) ($9B) and Chesapeake Energy Corp. (NYSE:CHK) ($12B) and still has enough left over to pay executive bonuses second only to Goldman Sachs!

What a company!!!

"How did they do it?" you may ask:

  • Did they discover more oil? No, Exxon does less exploration than any major oil company.
  • Did they improve operations? No, operating costs per barrel are way up.
  • Did they increase market share? No, the majors are losing market share across the globe.
  • Did they produce more oil? No, Exxon's production is in steady decline.
  • Did they double their profits? No, Exxon's profits are up 40% from 2004

So how do they do it? Well, it seems the mighty mighty Exxon corporation has pursued a single, simple strategy to go from being a $200B company to being a $424B company (or $453B last week). In just 3 years... buying back $55B worth of their own stock! In the past 4 quarters, in which Exxon generated an amazing $55B in cash by gouging the consumer finding the perfect price for their product, all but $3.5B of that money was spent on purchasing their stock (75%) and dividends (25%).

So when you wonder just what sort of nutjobs were buying XOM stock up to $79, even while the price of oil was plunging -- now you know! The biggest buyer of Exxon stock in 2004, 2005 and 2006 is Exxon and now, as Howie Mandel likes to say, let's see if they made a good deal:

They are already guiding flat sales ($398B vs. $3876B) for '07. They made $40B this year so let's say costs are $350B.

Transocean Inc. (NYSE:RIG) projects a 100% increase in profits, Schlumberger Ltd. (NYSE:SLB) expects a 20% increase in profits... so you know their costs will go up let's say just 10%, which will include labor, health, materials, shipping, rentals, inflation, the Dems actually making them pay their taxes... let's say it's all just 10%.

That's still $35B in additional costs. That means they net $388B in costs on $398B in sales, a far cry from $40B!

Since they sell oil, we can also assume that they were assuming oil would not drop significantly in price from this year's average of $65. Oil averaged $55 in '05 and the company "only" had $370B in sales and $36B in profits.

So we have a few interesting things going on here: When XOM went from '04s $298B/25B to '05 $370B/36B the stock rose from $50 to $60 (20%) but, this year as the stock goes from '05 $370B/36B to $387B/40B the stock jumped from $60 to $77 (28%).

Meanwhile they've been buying back stock, but they've run their accounts payable up from $46B to $54B with total liabilities up $10B since last year.

In three quarters so far this year $29B in net income has only translated to $4B of cash flow. If this were my company I'd be asking a lot of questions about how come the money we make doesn't seem to find its way into a bank!

Lastly, if the company took in $370B when oil was at $55, how come they "only" are taking in $387B with oil at $65, its an 18% increase. Conclusion: Unit sales are down! What happens if the price increase doesn't stick and unit sales don't pick up?

This does not sound like a good deal at all! Now we come back to the old, reliable Roach Motel Theory where we have $424B worth of shareholders trapped in a company that may only be worth $300B. What happens to those investors when Exxon stops buying back shares? The company already spent almost $30B this year buying stock at an average of $68 per share. If the stock drops to $61 that means Exxon blew $3B on a bad stock deal and the rest of the $26B (we'll ignore the $27B they spent in '04 and '05) is tied up in a very illiquid position.

It's not all bad news for Exxon though. They managed to weasel out of paying for part of that Valedez oil spill after 15 years of appeals and they're making some great progress in the field of denying global warming so let's hear it for one of America's greatest corporations as they sink back to the levels they so richly deserve.

Exxon 09 01 2007