Like sands through the hourglass, so are the days of ExxonMobil. Each year brings a new promise to grow production and build reserves “the old fashioned way.” They spend 20 billion. They spend 40 billion. The CEO is interviewed, and gives his patient outlook on the price of oil. (has no idea). Cash builds up on the balance sheet. The company is praised, for not being aggressive. The company is criticized, for not being aggressive. More cash builds up on the balance sheet. Investor groups become alarmed, at an apparent lack of strategy. Production stays flat, year after year. Reserve replacement flattens.
When Rex Tillerson was made CEO of ExxonMobil a few years ago he was asked for his outlook on the price of oil. Rex stated that was not his job, and that frankly he didn’t care. Now, that’s probably the kind of attitude that caused the Rockefeller heirs to probe the board, for a new strategy. While misunderstood as a push for investment in Alternative Energy, the Rockefeller group was correctly identifying the fact that Exxon was led by an intellectually incurious CEO, and that the company was sleepwalking its way into a paradigm shift in energy supply. Spending 20 billion a year just to keep production and reserves flat does, indeed, indicate a state of denial.
It’s not the fault of Exxon that free-world energy supply is expensive, and hard to reach. However, it is absolutely the responsibility of Exxon to recognize those conditions, and do something about it. Allowing cash to build up on the balance sheet over the same 5 year period that the purchasing power of that cash was rapidly declining is yet another example of inaction. It approaches a level of incompetence, and again, reflects on CEO Tillerson’s inward looking perspective. Exxon is fighting the last war. And, no amount of self-absorbed investor satisfaction, over the fact that XOM has been a great investment over the long term, alters the fact that the company is asleep at the wheel.
This is why Exxon needs to get rid of its cash now, and buy reserves in the ground made cheap by the bear market. This is probably the last time XOM will see strong purchasing power for its cash, before inflation returns. Despite the fact that the market will, at times of severe stress, take comfort in Exxon’s cash position–as it did over the past 4 weeks–it appears to me the company needs a currency strategy if it’s going to continue building a USD based cash mountain. Exxon should use these brief interludes of USD strength to buy other currencies, and, to buy other companies. They should start with a buyout of their majority owned Imperial Oil, in Canada. Then they should move on to a US based pure play Natural Gas name, like CHK, XTO, DVN, APC, or EOG. Exxon needs to get into position also for policy shifts coming out of Washington. In particular, having a larger exposure to domestic NG production could help shield XOM in the coming political environment.
My advice to ExxonMobil therefore is to buy somebody. Anybody. Buy two companies, in fact. Moreover, there is another supply-demand equation coming that’s outside of oil, that Exxon needs to pay attention to. And that’s the coming supply of new Treasuries. With weak US growth and a huge new supply of government debt, cash rich companies like XOM need to make plans now, for a time of new lows in the USD.
-Gregor
