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ExxonMobil considering acquisitions

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Exxonerated

Published: March 7 2009 02:00 | Last updated: March 7 2009 02:00

The notion that large and diversified companies fare better in a downturn has been soundly discredited by the financial crisis. While the consequences have been far less dramatic for oil and gas supermajors than for financial supermarkets, their broad geographic reach and involvement in every aspect of energy from exploration to fuel retail has been no saving grace – every link in the chain is weak.

There is more than one way to buck the economic cycle though. Crude is now $100 a barrel below its July peak and downstream margins have been pinched too, so it is hardly astonishing that BP, Royal Dutch Shell, Chevron and ConocoPhillips are all freezing or cutting capital expenditures this year. The surprise is that ExxonMobil, the fifth and largest supermajor, will spend 11.1 per cent more. It is also considering acquisitions. This suggests that it was not being overly conservative, as some critics charged during the boom, just frugal.

In recent years, Exxon focused on low-hanging fruit, letting its rivals battle over more marginal projects that required higher commodity prices to be profitable. This is reflected in its reserve replacement cost, which was $6.48 per oil equivalent barrel between 2004 and 2007, lower even than BP with its cheap but risky Russian fields and less than half of Shell or Chevron.

It instead returned the excess cash to shareholders. Combined buybacks and dividends as a percentage of its capital spending were four times that of Shell and more than double BP and Chevron over the past year. In spite of gaudy numbers, Exxon’s bosses seem to recognise that the energy business is no more profitable than others over a complete cycle. At the same time, assets are relatively long-lived. By being conservative when others were not, it avoided overpaying and, now that others are cutting back, it has less competition for new projects. Let the bargain-hunting begin.

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