Exxon Investors Riled as Buybacks Fail to Lift Shares

By Joe Carroll

May 26 (Bloomberg) -- Exxon Mobil Corp., the biggest U.S. oil company, is facing investor criticism over pouring $104 billion into stock buybacks rather than using cash for acquisitions that would boost reserves.

Exxon Mobil spent more than $3.6 million an hour on share repurchases since Rex Tillerson took charge as chairman and chief executive officer in January 2006. Production slid in 2008 to the lowest since Exxon Corp.’s 1999 purchase of Mobil Corp., the company’s last major acquisition, and reserves dropped for a second straight year for the first time in at least 15 years.

Buybacks failed to stem a 15 percent drop in stock price in this year’s first three months, the worst quarterly return since 2002. That move followed the stock’s biggest one-year decline in more than a quarter-century. Tillerson and the Exxon Mobil board can expect investor barbs over their strategy when the company holds its annual shareholders meeting tomorrow in Dallas.

“How wise is it to be buying back your own company when you could be acquiring reserves that are cheaper than your own?” said Haag Sherman, who helps oversee $8 billion as a managing director at Salient Partners LP in Houston. “Buying mid- or small-cap producers that trade at a discount would be a better use of capital.”

Sherman said that’s especially true after a plunge in energy prices and the credit crunch created opportunities for bargain acquisitions. Producers that trade lower than Exxon Mobil in price per barrel of reserves include Los Angeles-based Occidental Petroleum Corp., the largest producer of Texas crude, and Total SA, France’s biggest oil company, he said.

Treasury Shares

Buybacks swelled Exxon Mobil’s stockpile of treasury shares to 3.14 billion. Tillerson, 57, has said the treasury stock, currently valued at more than $219 billion, is available for acquisitions if worthy targets surface.

Shareholder proposals on the ballot for tomorrow’s annual meeting include one that would force Irving, Texas-based Exxon Mobil to split the roles of chairman and CEO. Tillerson, who declined to be interviewed for this article, holds both of those titles, as did his predecessor, Lee Raymond.

The chairman-CEO proposal, submitted by investor Robert Monks, calls on Exxon Mobil to follow BP Plc and Royal Dutch Shell Plc in appointing a chairman who isn’t a company executive. The company said in a public filing that the authority to choose a chairman should remain with its directors.

There are 10 other shareholder initiatives, including proposals to: cap greenhouse-gas emissions from refineries and chemicals plants; increase investment in renewable fuels; and enable stockholders to have an advisory vote on CEO pay.

Reserves Tumble

Exxon Mobil spent almost $36 billion on share repurchases last year, more than the combined total of the world’s 10 next largest energy producers. The company cut buybacks by 13 percent to $7 billion in the first quarter and by an additional 29 percent in the current three-month period to $5 billion.

Oil and natural-gas reserves dropped 3 percent in 2008, almost double the previous year’s rate of decline. Profit this year is estimated by analysts to plunge more than 60 percent, which would be the biggest drop since Exxon bought Mobil.

Exxon Mobil trades at about $16 per barrel of reserves, compared with $14.73 for Royal Dutch Shell Plc and $11.54 for San Ramon, California-based Chevron Corp., according to data compiled by Bloomberg. Paris-based Total and BP of London both trade at less than $9 per barrel of reserves.

Exxon Mobil rose 98 cents to $69.81 today in New York Stock Exchange composite trading. The stock has nine buy and nine hold ratings from analysts, as well as one sell recommendation.

Spending Plans

Acquisitions aren’t among the top three priorities for use of a cash hoard that stood at $25 billion as of March 31. Assets of publicly traded rivals are too expensive or too small, David Rosenthal, vice president of investor relations, told investors on an April 30 conference call.

Rosenthal said the priorities are: capital projects, such as building offshore oil platforms; dividends; and stock repurchases. By design, as the amount of stock outstanding is reduced, buybacks add value by driving up earnings per share and making each share represent a larger ownership stake.

Buybacks have prevented Exxon Mobil’s share slide from being steeper by “putting a floor under the stock price,” said Douglas Ober, who manages $550 million as chief executive officer at Petroleum & Resources Corp. in Baltimore.

Tillerson told investors at a March meeting in New York that the company will begin pumping oil and gas from nine new projects this year that will add the equivalent of 485,000 barrels of crude a day to output. He aims to boost production by 2 percent this year.

Overpriced Acquisitions

Also at the March meeting, Tillerson said buybacks were a better investment than acquisitions in recent years, at least partly because surging commodity markets inflated asset prices.

“Some in our industry used their cash during this timeframe to purchase assets at the top of the price cycle,” Tillerson said. “Many of these assets were written off, leaving their shareholders with no value.”

Seven of Exxon Mobil’s 10 largest stockholders, including Barclays Global Investors and State Street Corp., sold more than 58 million shares combined in the first quarter. At the same time, Exxon Mobil bought 107 million of its shares, reducing stock outstanding by almost 2 percent.

“Share buybacks in this environment are frowned upon because that capital can be better deployed to build the reserve base,” said Gianna Bern, president of Berkshire Advisory & Research Inc. in Flossmoor, Illinois. “Exxon should use that cash to build reserves and do anything it can to stem its production decline.”