The Oil and the Glory

Exxon Valdez is so yesterday

Reputation matters enormously in the oil business. It is the currency required for good relations with regulators and the public, whose opinion can affect an oil company’s ability to get new deals, and keep existing ones — not to mention attract and keep top employees. Needless to say, BP’s is in tatters. At the same ...

CHRIS WILKINS/AFP/Getty Images
CHRIS WILKINS/AFP/Getty Images

Reputation matters enormously in the oil business. It is the currency required for good relations with regulators and the public, whose opinion can affect an oil company's ability to get new deals, and keep existing ones -- not to mention attract and keep top employees. Needless to say, BP's is in tatters.

At the same time, the spill has been an elixir for the last company to suffer such opprobrium: ExxonMobil, the owner of the Valdez oil tanker, whose accident two decades ago is still associated with soiled beaches and oil-soaked birds. Since the April 20 Gulf spill, the rest of the industry has repeatedly noted that Exxon is the gold standard in terms of safety. That image could provide the company an advantage in the race for resources around the world.

Yet, as I've discussed, Wall Street has punished Exxon along with BP -- not anywhere near the same extent (BP's shares are down 51 percent since the spill; Exxon's have fallen just 9 percent). But Exxon's shares have languished near a 52-week low for a month now. This means that, regardless of who is safest, the narrative of how Big Oil as a group survives our times remains.

Reputation matters enormously in the oil business. It is the currency required for good relations with regulators and the public, whose opinion can affect an oil company’s ability to get new deals, and keep existing ones — not to mention attract and keep top employees. Needless to say, BP’s is in tatters.

At the same time, the spill has been an elixir for the last company to suffer such opprobrium: ExxonMobil, the owner of the Valdez oil tanker, whose accident two decades ago is still associated with soiled beaches and oil-soaked birds. Since the April 20 Gulf spill, the rest of the industry has repeatedly noted that Exxon is the gold standard in terms of safety. That image could provide the company an advantage in the race for resources around the world.

Yet, as I’ve discussed, Wall Street has punished Exxon along with BP — not anywhere near the same extent (BP’s shares are down 51 percent since the spill; Exxon’s have fallen just 9 percent). But Exxon’s shares have languished near a 52-week low for a month now. This means that, regardless of who is safest, the narrative of how Big Oil as a group survives our times remains.

Last week, I ended a post on the BP spill with a single sentence in which I wondered aloud why, despite its good management, anyone would invest in Exxon, since the company doesn’t grow, and pays the lowest dividend (2.79 percent) in its peer group (at least it did until BP recently suspended its peer-leading dividend of 9 percent).

Dan Sibley, who is general counsel at Reef Oil and Gas in Dallas, wrote back in Exxon’s defense. In the 1990s, Dan worked for Nimir Petroleum, a Saudi Arabian company that was involved in the Azerbaijan oil rush. Dan wrote that Exxon doesn’t "really pay miserly dividends":

They use their huge cash profits to buy back their own stock.  That’s a pretty gutsy move for the long term, and I respect people who are more concerned about the future than today’s stock price. They’ve bought back over a $150 billion of their own stock over the past 10 years — which, I think, for a value investor is a huge vote of confidence in their company by their management and board.

And even more telling is that they are really a pain in the butt to deal with — because they want everything done to an excellent level, not just an acceptable level.  I set on a tax committee with their lawyers when — late in the game — they bought into the Azerbaijan Caspian deal — in 1996, I think.  They put three lawyers on that deal, full time, and the other companies (like BP, Amoco, Pennzoil, Unocal) only had one lawyer each working on it, with most of us letting BP and Amoco do the lion’s share of the work (quite well, I might add).  The Exxon lawyers had to re-visit every detail of the committee’s work, which was irritating and time consuming, but a legitimate request on their part.

Finally, and most importantly, the most intelligent chemical engineer that I’ve ever known (my father-in-law) would only buy Exxon gasoline and Michelin tires, because those two companies stood way above the industry in their technical requirements for raw materials, and they tested every load of feedstock and sent it back if it did not meet their very high standards.

Dan is referring to Exxon’s repurchase of its own shares. I also am an admirer of Exxon’s internal standards and management. But I’m not convinced about the buybacks. Exxon depicts buybacks in the same breath as dividends — that they are dollar-for-dollar equivalent to cash dividends, when they aren’t, since they go not into a shareholder’s pocket, but into the company treasury.

In one view, buybacks are an artificial way of propping up the share price. Right now, they are a fad on Wall Street, where there is much cash but little courage to reinvest in one’s own company. Superior management has exceptional value only if it’s delivering either growth or dividends. If cannibalization is Exxon’s principal strategy for why a share is worth more tomorrow than today, I think people are going to figure that out.

Jim Chanos, a short-seller at Kynikos Associates, is shorting Exxon for these and other reasons. (In an interview with Bloomberg TV’s Erik Schatzker, Chanos was actually a bit cagy about just which Big Oil company he is shorting, but Clusterstock’s Teri Buhl discovered that it’s Exxon.)

<p> Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory. </p>

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