Online Extra: Why ExxonMobil "Makes Bets Early"

Says CEO Lee Raymond: The time scale this industry operates on is different from other industries, making savvy foresight key
The BusinessWeek 50

When it came to generating profits last year, no U.S. company was better than ExxonMobil Corp. (XOM ), No. 23 on the latest BusinessWeek 50 list of America's top-performing companies. In 2003, the world's largest oil company racked up record earnings of $21.5 billion, up 91% from 2002, on revenue of $246.7 billion. In addition, the Irving (Tex.) energy giant posted industry-leading return on capital employed of 21% and cash flow from operations and asset sales in excess of $30 billion, while returning a record $11.5 billion to shareholders through dividend payments and share purchases.

Last year's success was just the latest in a string of accomplishments for Chairman and CEO Lee R. Raymond, who has been at the helm since 1993. His biggest: the $81 billion merger between Exxon and Mobil in 1999. Since the merger, ExxonMobil has generated $120 billion in cash and distributed $47 billion to shareholders. To put that in context, Raymond says the shareholder distributions alone in the last five years have exceeded the market capitalization of 98% of the companies trading on the New York Stock Exchange.

In the last five years, ExxonMobil has earned $74 billion, representing the combined profits of nearly 400 of the 500 companies in the Standard & Poor's 500-stock index over the same period. In addition, ExxonMobil has captured $10 billion in synergies and cost efficiencies.

Raymond recently spoke to BusinessWeek Dallas Correspondent Stephanie Anderson Forest about ExxonMobil's success and the outlook for the oil and gas industry. Here are edited excerpts from their conversation:

Q: Robust energy prices played a big role in the success of a lot of energy companies last year. But what other factors do you attribute to ExxonMobil's success -- not only last year, but year in and year out?


You're right, energy prices have basically lifted all boats. But if you look at it over a period of time, we have outperformed all of our competition regardless of higher or lower prices. So the question is: Why have we outperformed the industry, regardless of prices? Disciplined investment decisions with a focus on long-term fundamentals and operational excellence in all aspects of our business lead to solid returns and superior cash flow. We're better at doing that than the others.

It's also our consistent commitment to and application of technology, as well as how we adapt to the changes in the business. This is a volatile industry. [It goes] through a lot of ups and downs, but our company tries to stay the course. We don't overreact to the high side or the low side. We're in a long-term business, and there are going to be ups and downs.

Q: Last year, many industry observers predicted oil prices would fall after the Iraqi war. Yet prices have remained stubbornly high. How do you explain this?


One is that demand continues to grow, and the industry is having a difficult time keeping up with having to replenish its production plus meet future demand. And then there's the whole issue related to stability and security of supply. Venezuela has a problem. Nigeria has a problem. Iraq has a problem. The combination of all of those things doesn't give you a lot of comfort.

Q: How big a role has OPEC's discipline and ability to manage the oil markets played in keeping crude prices elevated?


It has played a role. But [OPEC] also has had an environment that has been conducive to allowing it to manage what's going on. If supply and demand hadn't been in such close balance, it would be much more difficult for OPEC.

Q: What are the key challenges facing the industry these days?


As the world continues to grow economically and use more energy, we will need more oil and gas. We not only need to replenish the [production] base, but we also need to grow the supply. Another challenge is [the] natural gas [supply crunch in North America]. A key to solving the natural gas problem will be the evolution of LNG [liquefied natural gas] in the U.S.

Q: So, how does the industry meet the challenge of replenishing production while meeting future demand?


That's a long-term problem that requires successful exploring. It also involves technical and financial skills. It's about our ability to find oil and gas on terms that are economic.

You have to understand that to get anything done in this business takes several years. You can't wake up one morning and say I'm going to go find more oil or natural gas. The time scale this industry operates on is different from other industries. It's a long-term business, so you have to make bets early.

Q: And where has ExxonMobil been placing its bets?


In the early '90s, we saw opportunities in West Africa, Angola, Equatorial Guinea, Nigeria, Chad, the former Soviet Union and Russia itself, which has a huge resource base and is going to have a huge impact.

Q: How big of a global impact will the development of Kashagan oil field have? [In February, 2004, a consortium of oil majors including ExxonMobil formally agreed to proceed with the $29 billion development of this oil field in Kazakhstan. The largest oil discovery since Alaska's Prudhoe Bay some 30 years ago, Kashagan is estimated to have total oil reserves of about 13 billion barrels.] A: It will have a large global impact over a long period of time. The first oil won't be produced until 2008, and then [it will be] another 10 years until it reaches plateau production in terms of millions of barrels a day.

Q: You mentioned earlier that a key to the solving the natural gas problem would be the evolution of LNG. What role do you see LNG playing?


It's going to be very important over the long term. It's very clear in the [September, 2003] NPC [National Petroleum Council] report that the resource base in the U.S. will not be able to support the demand growth over the next 20 years. The only real alternative is LNG, which will require the development of a very significant amount of infrastructure activity over the next few years.

Q: It will take another three to four years before LNG begins to have a meaningful impact in North America. What does that mean for North American natural gas markets in the meantime?


A lot of volatility. We had a similar problem in crude oil in the late '60s and early '70s, where the U.S. came to the realization that it would become a major, major importer of crude. So, you go through a period where the market is unstable, and you have of a lot of volatility. That will be the case for natural gas for a while.

Q: What's the solution to the high gasoline prices we've seen in recent weeks, well ahead of peak season?


I don't know there is a solution to that problem.... Nationwide, nobody has built a new refinery in this country in 30 years. Some have even been shut down. The country will eventually run out of refining capacity, and where do you go to from there?

Also, when you talk about high gasoline prices, you have to take off all the taxes to figure out what's the real price [of a gallon of gasoline]. And the price of crude oil is up. We have no control over that. People talk about high crude prices, but many aren't aware that we are the largest buyer of crude oil in the world [for our refineries]. So, we are are acutely aware of high crude oil prices.

Q: Much has been made in recent months about questionable accounting for proved reserves in the industry. What's ExxonMobil's policy on booking reserves?

A: I can't speak about anyone else's business. But we've had a system in place for many, many years that we think complies with rules set forth by the SEC [Securities & Exchange Commission] of what constitutes a proved reserve. The last time we looked at the system in great deal was in the early 1990s, when we put in place a system that is very, very rigorous in how you determine what reserves get booked.

For instance, one thing we do is reappraise those properties that are producing every year and use the production information from the last year to determine what changes need to made in each of these fields.... We have a group that monitors all of this, and together they have 150 years of experience. Any significant changes in reserves or new bookings have to be cleared here [at ExxonMobil's headquarters]. There are lots of checks and balances.

Before it's here, it's on the Bloomberg Terminal.