ExxonMobil: Rockefeller’s rule

Spend a third, save a third and give a third away. So John D Rockefeller, the founder of what today is ExxonMobil, budgeted his income. He demanded that his children account for their allowances the same way. Exxon’s management has shown similar parsimony. And the company, as a rule, has had plenty of free cash flow to give away to shareholders.

In recent years, though the spending has looked profligate. Exxon gambled $41bn on US gas explorer XTO, just before gas prices went south. A low margin project in Iraq looks iffy. There is a hazardous venture in Kurdistan, for which it is rumoured to have paid $1.5bn. Finally, there is Exxon’s investment in the Russian Arctic, partnered with Rosneft, the state oil company (cost: probably $100m for one well). On Saturday, Rosneft announced a big discovery in the Kara Sea. But sanctions limiting US direct investment in Russia could prevent Exxon from fully exploiting the find – which would require much more drilling.

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Exploration spending elsewhere may have peaked. Its most capital intensive projects for heavy oil in Canada, LNG in Asia and oil in Kazakhstan (at troubled Kashagan) will complete over the next few years, Credit Suisse notes. From 30 per cent of exploration spend, the big projects will dwindle to less than five. Free cash flow should double from last year’s $11bn, a four-year low. Russia could have provided a destination for reinvestment. Pity.

Exxon does not score many exploration successes. Oil and gas production growth has fallen 2 per cent a year since 2010, according to BMO Capital Markets.

Exxon’s competitive advantage is access to capital. Though XTO has not worked (yet), it is time the company considered acquiring more production growth. Take a deep breath: BP might fit nicely. It trades at a 25 per cent discount to Exxon on a multiple of price to estimated earnings. Given Exxon’s low borrowing costs of 1 per cent, at Tuesday’s price a combination shares and cash deal (say, half each) for BP would be accretive to earnings with only modest cost-cutting. Though Exxon would remain ensnared in Russia via BP’s equity stake in Rosneft, that factor seems to be discounted in BP’s valuation.

John D would not approve of giving it all away. He would want a big slice spent on expansion, too.

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