Pumping Cash, Not Oil

With gas prices hitting record highs, Exxon Mobil (XOM ) Corp. ought to be drilling like mad and refining more of that black gold, right? As it turns out, the world’s largest oil producer thinks it is smarter to use more of its resources to buy back stock. The indirect result: increased pain at the pump for consumers.

It’s Big Oil’s new formula for making money. Last year, Exxon pumped out $49 billion in operating cash flow on sales of $365 billion. It’s the world’s most profitable company, but Exxon is plowing a smaller percentage of its spare cash back into the business. Although capital expenditures have risen from $11 billion at the start of the decade to nearly $20 billion, that spending amounts to roughly 40% of cash flow, down from 50% in 2000. Meanwhile, overall production has barely budged since its megamerger in 1999.

Instead, Exxon is bingeing on buybacks to help boost profits, which also benefit from higher commodity prices. Repurchases have been part of Exxon’s strategy for decades, but they’ve exploded in recent years. Exxon spent 60%, or $29 billion, of its cash flow on repurchases in 2006, more than any other company in the Standard & Poor’s 500-stock index and a tenfold increase since 2000. The company has retired 16% of shares in the past five years, adding an estimated 88 cents to earnings of $6.68 per share. With Exxon’s stock handily beating the market and peers with a 15% annual return over the past decade, others in the oil patch are catching on to the strategy. “They don’t need to grow production in order to generate shareholder returns,” says energy consultant Richard Gordon.

Business Week