Can ExxonMobil Do More With Less?

Stocks opened higher this morning, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.27% and 0.4%, respectively, at 10:15 a.m. EST. Meanwhile, Dow component and energy supermajor ExxonMobil (NYSE: XOM  ) announced yesterday it is reducing its capital spending program in a continued effort to focus on profitability and returns on invested capital.

Last year marked a record high for ExxonMobil capital investment at $42.5 billion. That figure is now expected to fall to about $40 billion this year, followed by an annual average of less than $37 billion in 2015-2017, excluding any acquisition. That will necessarily impact production: the company now says it expects to produce the equivalent of 4.3 million barrels of oil and gas per day in 2017, which would top the 4.2 million achieved in 2013, but is 10% below the projection of 4.8 million for 2017 it gave a year ago.

ExxonMobil's decision is consistent with the path already taken by supermajors Chevron (NYSE: CVX  ) , Royal Dutch Shell, and Total. Chevron, for example, in December announced a $39.8 billion capital and exploratory investment program for 2014 -- the same size as ExxonMobil and roughly $2 billion less than Chevron's then-expected total investments for 2013. However, ExxonMobil is already at the top of its peer group in terms of return on capital; its five-year average return is 17.3%, according to data from S&P Capital IQ.

True to ExxonMobil's laser focus on profitability, CEO Rex Tillerson told analysts this week that the company aims to "remain disciplined and selective with our capital, ensuring that any new investment contributes to robust cash flow growth." Furthermore, Tillerson said ExxonMobil plans to rebalance its investments in favor of the downstream segment.

ExxonMobil's decision comes at a tricky time for the supermajors, as some investors have voiced concerns that dwindling production growth and rising capital expenditures will strain their ability to maintain dividend payouts and share buybacks at the level of recent years. Last week, an influential investor raised another thorny issue for oil and gas companies. Norway's sovereign wealth fund -- which owns on average 1.25% of every single listed company in the world and is itself the product of oil revenue -- made waves when it said it will examine whether it should invest in oil, gas, and coal companies at all due to concerns over global warming.

In his 2011 annual letter to shareholders, Berkshire Hathaway CEO Warren Buffett wrote that "a century from now ... ExxonMobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions." Maybe so, but I would suggest the ride (and even the destination) may not be as smooth as that statement suggests -- even the Oracle of Omaha has trouble seeing that far out.


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