Exxon Raises Spending 11% Even as Rivals Reduce Costs

March 5, 2009, WSJ

By Russell Gold

Capitalizing on recent years of soaring oil prices and conservative investment, Exxon Mobil Corp. said it will boost spending on energy exploration and production by 11% to $29 billion this year, even as many of its rivals are cutting costs.

The Irving, Texas, energy giant's spending increase comes as oil prices hover at five-year lows below $45 a barrel and as the global recession drives down demand for oil, natural gas and chemicals. Exxon's competitors have slashed their capital budgets and delayed projects in recent months, trying to preserve their balance sheets and avoid cutting dividends.

But the only concession to the depressed economic outlook that Exxon has made is to cut its share buybacks to $7 billion this quarter, down from $8 billion in each of the previous four.

"We really are making no adjustments to our business strategy," Exxon Chairman and Chief Executive Rex Tillerson told analysts at the company's annual presentation at the New York Stock Exchange. "Around the house, it feels very business as usual."

Exxon's spending this year will come in toward the top of the $25 billion to $30 billion the company had said it would spend each year through 2013. Last year the company spent $26.1 billion and much of which was eaten up by increased labor and materials costs. With drilling and other expenses now falling sharply, this year's $29 billion should go even further. A stronger dollar will boost overseas spending power.

Even so, investors and analysts continue to worry about Exxon's ability to increase production by replacing dwindling fields with new supplies. Despite the planned 11% spending increase this year, Exxon projected production will grow 2% to 3% annually for the next five years. Production fell 6.2% last year. Even as Exxon showcased its financial strength Thursday -- it had $32 billion in cash and only $7 billion in debt at the end of last year -- the company's stock fell with the broader market, dropping 5.3%.

"Exxon Mobil's capital expenditure per barrel produced is up 40% since 2006, with no discernible change in the expected production," said Mark Flannery, head of energy equity research at Credit Suisse Securities. That's an indication that the cost of producing oil will likely remain high, despite the deflation in costs and oil prices, he said.

Mr. Tillerson took a jab at competitors, a rarity in a typically collegial industry in which rival companies often team up on projects. "We have maintained our rigorous decision making and disciplined approach to investing throughout this very challenging period," he said. "Others have not," he said, citing write-offs and reduced spending.

Plunging oil prices have been a vindication of Exxon's investment caution during the oil boom. As oil prices rose in 2007 and 2008, Exxon came under fire from investors and government officials for not ramping up spending fast enough. Exxon argued that the high prices were overheated and temporary.

Now, with falling oil prices drastically reducing revenues, many of Exxon's counterparts are struggling to pay handsome dividends, fund massive capital budgets and increase their oil and gas production. BP PLC Chief Executive Tony Hayward said this week that the London company needs crude oil to trade at $60 a barrel to cover BP's dividend payments and capital-spending plans. Oil prices have been under $60 a barrel since November. BP plans capital spending of between $20 billion and $21 billion this year, down from $21.7 billion last year. ConocoPhillips cut capital spending by 18% this year, to $12.5 billion.

Exxon isn't immune from the pain of the global financial crisis. The company said it planned to spend $4.6 billion this year to boost its pension portfolio, which has been hammered by falling stock prices. And the company's stock has fallen with oil prices, trading down 33% from highs of $94.56 last year.