Exxon's Problem of Riches
The largest and most valuable company in the US announced record profits in the wake of high gasoline prices and faced increased criticism from some US politicians and the general public.On May 09, 2006, the Wall Street Journal reported that Exxon Mobil (Exxon), the largest company in the US, was close to displacing Microsoft Corporation (Microsoft) as the non-financial company with the world’s largest cash reserves1. As on March 31, 2006, Exxon’s cash reserves were US$ 31.9 billion, while Microsoft’s cash and short-term investments were US$ 34.8 billion. The Wall Street Journal also reported that Exxon was increasing its cash reserves at a fast rate and could overtake Microsoft by July 2006.
The period 2005 had proved to be a bountiful year for Exxon and other US oil companies like Chevron, and ConocoPhillips. The high oil prices had resulted in increased profits for these oil firms. For FY 2005, Exxon posted a record profit of US$ 36.13 billion, the highest reported annual profit for a company in the corporate history of the US. The previous record was US$ 25.3 in annual net income that was also set by Exxon in 2004. Also, in 2005, Exxon had overtaken General Electric Co. in terms of market capitalization, to become the most valuable company in the US.
According to the company, in 2005, its average price for crude oil and natural gas in the US was US$52.23 a barrel2 and US$11.34 per 1,000 cubic feet respectively. In 2004, the prices were US$38.85 per barrel for crude oil and US$6.61 per 1,000 cubic feet for natural gas. However, Exxon’s representatives mentioned that though the rise in oil prices helped the company achieve record profits, the company’s good performance was also due to its ability to complete projects on time and keep costs in check.
“We continue to identify world-class projects, post industry-leading returns, and are well-placed for continued growth. Our record results show a disciplined approach and we continue to deliver superior value to our shareholders,”3 explained Henry Hubble (Hubble), Exxon’s vice president of investor relations. In 2006, Exxon continued on its growth path when it reported revenues of US$88.98 billion and profit of US$8.40 billion for the first quarter.
Though its first quarter profit was lower in comparison to the fourth quarter of 2005, it was up 7% over the first quarter of 2005. In April 2006, Exxon also announced payment of US$ 7 billion to its shareholders through dividends and share buybacks. This payout was a 67% increase when compared to the previous year. However, despite the improved earnings results for Q1 2006 and a huge dividend payout to its shareholders, there was not much enthusiasm among analysts and the general public. While market analysts opined that the earnings were below their expectations, the huge profits earned by Exxon made it the target of US lawmakers and the general public.
[1] Berkshire Hathaway Inc., an insurance and investments management company, had the largest cash reserves of around US$ 43 billion in cash and other short term investments as of March 31, 2006.
[2] barrel is equal to 42 US gallons or 158.97 liters.
[3] “Exxon Mobil Posts Record Profit of $10.7 Billion,” www.msnbc.msn.com, January 30, 2006.
