ExxonMobil (XOM) is Hoarding Cash and Stockholders are Paying the Price

Bloomberg reports that XOM’s cash stockpile is contributing to share price drop.

ExxonMobil (XOM) is Hoarding Cash and Stockholders are Paying the Price
Photo: TheTruthAbout, Creative Commons, Flickr

In a climate where we talk about a company’s available capital and shake our heads at the poor capitalization of such companies as Fannie Mae and Freddie Mac, it seems a little strange to be pointing fingers at a company that has large amounts of cash. But that is just what is happening right now. Bloomberg points out that ExxonMobil (XOM) may have too much cash — and it could be hurting stockholders:

Exxon Mobil, whose market value of $410 billion is larger than any other company, earned a record $40.6 billion last year. At the same time, the company’s capital spending as a percentage of sales was the lowest in the industry. Its stock is dropping despite $80 billion in buybacks since December 2005. The shares fell 73 cents to $78.88 today…

Exxon Mobil spent the equivalent of 57 percent of the cash generated in the past four quarters on buybacks, three times the ratio of other major U.S. oil producers, according to data compiled by Bloomberg.

And Exxon plans to use its capital to buy more stock. Along with Chevron (CVX), Exxon is well-known for its frequent stock buyback programs. Besides, with the stock market showing definite bearish tendencies, it is no surprise that a number of companies (including Microsoft — MSFT) are announcing stock buybacks today.

Exxon’s cash hoarding policy is something that is different from some of its Big Oil peers. While others are trying to find a way to increase reserves (through buying drilling equipment and acquiring exploration rights), XOM seems primarily interested in seeing how big its cash pile can grow. Using stock buybacks is just one way to do that.

Rather than making investments that are turning out to be somewhat shaky right now or entering into joint ventures (XOM would probably be blocked if it attempted to acquire a rival), ExxonMobil is playing it conservative and trying to ensure the long-term stability of the company. And, of course, CEO Rex Tillerson has a strategy of only investing in oilfields that have the potential to yield 1 billion barrels of reserves. Obviously, with a limited resource, such a strategy is rather limiting.

But it is clear that in the future things may have to change for XOM. Some larger diversification into alternative energy may be needed going forward in order to provide new areas for growth potential for a company that is in danger of stagnation.

Disclosure: I do not own Big Oil stock.

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